When a participant of a defined contribution plan complains that the plan fiduciaries breached their duties in failing to remove poor performing funds from the 401(k)’s investment options, is the date of the breach when the funds were initially selected?   Or is there a continuing breach for each day that the funds remained in the lineup? 

In Fuller v. SunTrust Banks, Inc., 2014 U.S. App. LEXIS 3610, 2014 WL 718309 (Feb. 26, 2014), the plaintiff, a former employee of SunTrust Banks, Inc., brought a putative class action lawsuit, alleging that the plan fiduciaries of SunTrust’s 401(k) plan had breached their fiduciary duties of loyalty and prudence when they selected and added certain investment options – SunTrust proprietary mutual funds – to the list of fund choices in SunTrust’s 401(k) plan.   The plaintiff alleged that these funds performed more poorly than other funds on the market, and that the fees charged were higher than the market.   

Defendants moved to dismiss under Rule 12(b)(6) on the grounds that the plaintiff’s complaint was untimely.  ERISA provides a specific time limitation for bringing a fiduciary breach claim:   The lawsuit must be filed by the earlier of:  (1) three years after the participant had actual knowledge of the breach; or (2) six years after the breach occurred.  As to the latter, the trigger date is: “(A) the date of the last action which constituted a part of the violation; or (B) in the case of an omission, the latest date on which the fiduciary could have cured the breach or violation.” ERISA § 413.

With respect to the first prong, the Court held that defendants’ Rule 12(b)(6) motion, which must be based solely on the Complaints allegations, was premature, without evidence as to when the plaintiff had actual knowledge of the breach.   The focus then shifted to the second prong.  Because it was undisputed that the SunTrust mutual funds at issue were selected and added to the 401(k) lineup more than six years before Plaintiff filed suit, the issue turned on whether the plan fiduciaries engaged in a continuing or subsequent breach in failing to remove the allegedly poor performing funds.     

The Court found that the plaintiff’s allegations in the Complaint concerning the SunTrust plan fiduciaries’ failure to remove the funds from the 401(k) options were “in all relevant respects identical to the allegations concerning the [initial] selection process.”    Thus, the Court held, without a set of circumstances or distinct conduct that was separate from the alleged breach at the time of selection, the accrual date of the alleged breach was the date of the initial selection for purposes of ERISA § 413, making the complaint untimely. 

The Fuller Court relied heavily on the decision last year in the Fourth Circuit, David v. Alphin, 704 F 3d 327 (4^th Cir. 2013), in which the Court of Appeals, under a similar fact scenario, dismissed the plaintiffs’ complaint as untimely after finding that it was “based on attributes of the funds that existed at the time of their initial selection…” and therefore was “at its core, simply another challenge to the initial selection of the funds to begin with.”  Id. at 341.

As the Fourth Circuit Court of Appeals was careful to do in Alphin, the Fuller Court declared that it was declining to decide “whether a fiduciary had an ongoing duty to remove imprudent investment options from a Plan in the absence of a material change in circumstances.”   Rather, it described its ruling as limited to the prevention of a “continuing violation theory,” which could thwart the purpose of ERISA’s six-year statute of repose.