Members of SunTrust Banks’ 401(k) plan fiduciary committee can’t be held liable for failing to remedy allegedly imprudent investment decisions made by their predecessors, a US district court recently ruled (Fuller v. SunTrust Banks, Inc., No. 11-784 (N.D. Ga. July 16, 2019)). The judge rejected the plaintiffs’ argument that current committee members should have known about the alleged breach and fixed it, finding those members have no obligation to investigate whether any breaches had occurred prior to their tenure.
The ruling addresses one claim in a class-action lawsuit challenging the decisions during 1996 through 2004 to include certain SunTrust proprietary funds in the plan’s investment lineup. The participants allege that the fiduciary committee making the selections back then didn’t consider alternative investments, compare the funds’ performance to third-party funds or analyze the funds’ fees, but instead chose proprietary funds that benefitted SunTrust.
By the time the participants filed the case in 2012, the members who had approved the funds no longer sat on the committee. However, the participants included then-current committee members in the suit, arguing their failure to remedy their predecessors’ breach was itself a breach of their fiduciary duties under ERISA.
The central issue in the participants’ failure-to-remedy claim was whether they needed to show the current members had actual or only constructive knowledge that the prior committee members had an imprudent process for selecting the funds. The participants argued that constructive knowledge is sufficient, and the information about fund selection in prior meeting minutes and other documents should have made current members aware of a possible breach. In particular, the inclusion of proprietary funds should have alerted current members that their predecessors had an imprudent selection process, the participants claimed.
The judge disagreed, stating that a failure-to-remedy claim requires actual knowledge of a predecessor’s breach. The judge found the participants presented no evidence that the current members actually knew of any flaws in their predecessors’ selection process, even though the current members testified that they “familiarized themselves with the Plan and spoke with other Plan Committee members.”
The judge further noted that even if ERISA required only constructive knowledge of a breach, the participants would not prevail on this claim since fiduciaries aren’t obligated to “scour past meeting minutes and interrogate Benefits Plan Committee members” to determine if a past breach occurred. The judge also found the mere inclusion of proprietary funds was insufficient to alert the current committee members that the selection process may have been flawed. Even if the funds had been underperforming when the current members joined the committee, proprietary funds aren’t inherently imprudent, the court noted.
The decision may come as a relief to any newly minted fiduciaries concerned about how far back their fiduciary exposure goes. As a district court decision, the ruling has limited precedential effect, and it’s unclear if the participants intend to appeal. However, the ruling is consistent with other federal court decisions and Department of Labor (DOL) guidance that says fiduciaries aren’t vicariously liable for a breach committed before their tenure (DOL Op. 76-95, Sept. 30, 1976). Instead, they have a separate fiduciary obligation to remedy any past breaches that become known to them after they assume their fiduciary role.