Ninth Circuit Decides Selection Of Retail Mutual Funds Was A Breach Of Fiduciary Duty

On March 21, 2013 the Ninth Circuit Court of Appeals issued its opinion in Tibble v. Edison International, http://cdn.ca9.uscourts.gov/datastore/opinions/2013/03/21/10-56406.pdf in which the Court ruled that the plan fiduciaries of the Edison 401(k) Savings Plan (the “Plan”) had breached their fiduciary duty by selecting retail mutual funds with 12(b)(1) fees when lower cost institutional funds were available. The Court affirmed lower court findings that the Committee had breached its duty by failing to investigate lower cost share classes and that such failure amounted to a breach of the duty of prudence.

Edison International, an energy company, co-sponsors the Plan along with Southern California Edison Company and Edison Mission Group. The 401(k) Plan has approximately 20,000 participants and plan assets in excess of $3.8 billion. The Plan includes employee salary deferrals and matching contributions by the sponsoring companies. The Plan started with six investment choices. In the late 1990s, the Plan expanded its investment options to include 10 institutional and collective funds, 40 mutual funds and a unitized Edison Stock Fund. A group of employees brought a Class Action lawsuit against the Plan Fiduciaries objecting to a number of retail class mutual funds in the array, claiming that the selection of the retail class shares was imprudent and the revenue sharing policy (which reduced administrative fees paid by the employer), violated the Plan Document and was a conflict of interest.

Other Findings by the Court:

The three year statute of limitations period had not run as the employees did not have actual knowledge of the breach more than three years before filing the suit.

Revenue sharing by mutual fund managers with Plan Sponsors is not per se, a prohibited transaction or breach of duty.

Reliance on ERISA Section 404(c) protection for participant directed plans was not available as a defense to imprudent selection of funds by the Plan’s fiduciaries.

Blind reliance on independent investment advisor Hewitt is not a defense against imprudent actions unless additional investigation of the recommended funds can be shown.

The finding of the District Court that the application of revenue sharing as an offset to the recordkeeping fees did not violate the pre-2006 Plan language which stated “the cost of the administration of the Plan will be paid by the Company” and was not an abuse of discretion.

The Tibble case reminds plan fiduciaries that following a prudent process is the most important defense against future claims for fiduciary breach. It was not what the Tibble Plan Committee did (include selected retail mutual funds), that got it in trouble. It was the fact that they had not investigated or considered available institutional funds which had annual investment fees 40 basis points less than the selected funds in their review process. It should be noted that institutional funds are not always available to retirement plans due to the amount of assets held for investment, so with small employer plans, (for example, plans with assets less than $5 million), retail funds may be the only reasonable option available.

To protect themselves against Tibble type claims, fiduciary committees should take steps to make sure that they are: 1) following written plan documents and procedures, including any investment policy statement and committee charters in place; 2) documenting committee meetings and decisions with respect to plan investments and 3) reviewing 408(b)(2) fee disclosure information and benchmarking fees to those of comparable plans based on number of participants and plan assets.

Topics:  Duty of Prudence, Fee Disclosure, Fiduciary Duty, Mutual Funds

Published In: Business Torts Updates, Civil Procedure Updates, Finance & Banking Updates, Labor & Employment Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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