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The Supreme Court has agreed to hear an appeal from the plaintiffs in Tibble v. Edison International, a 401(k) fee case. The Court will review only one issue:
Whether a claim that ERISA plan fiduciaries breached their duty of prudence by offering higher-cost retail-class mutual funds to plan participants, even though identical lower-cost institution-class mutual funds were available, is barred by [ERISA’s six-year statute of limitations] when fiduciaries initially chose the higher-cost mutual funds as plan investments more than six years before the claim was filed.
In this article we briefly review the Ninth Circuit’s Tibble decision, focusing on: (1) the retail vs. institutional share class issue; and (2) the application of ERISA’s statute of limitations to fund menu decisions.
This suit was brought by participants in Southern California Edison’s 401(k) plan against Edison, its corporate parent and certain plan officials. After motions, two ERISA fiduciary claims remained. One involved an allegation that plan fiduciaries breached their duty of prudence by selecting for the plan a money market fund that allegedly charged excessive management fees. The district court found for the defendant on this issue, the Ninth Circuit affirmed, and it is not being reconsidered by the Supreme Court.
The other claim considered on the merits by the lower court was an allegation that defendants breached their ERISA duties of loyalty and prudence by including in the plan’s fund menu the retail share class rather than the institutional share class of six mutual funds. Three of those six were “chosen after the statute of limitations period,” and the lower court considered plaintiffs’ claim only with respect to those three, holding that claims with respect to the other three funds were barred by the statute.
In defense of the decision to include these retail funds in the fund menu, defendants argued: (1) that public information about the fund and the fund’s performance history were available for the retail share class and not the institutional class; (2) that frequent changes to the plan might cause confusion among the plan participants; (3) and that certain minimum investment requirements might preclude the plan from investing in the institutional share classes.
The lower court found no evidence that reason (1) or (2) might apply to the decision with respect to the three funds. With respect to reason (3), the court found no evidence that plan fiduciaries had called the relevant fund managers to ask for a waiver of the minimum investment requirement.
Tibble highlights, once again (consider, e.g., the Tussey v. ABB litigation) the challenges presented by the use of a retail share class in a 401(k) plan fund menu when an institutional share class is available.
On appeal, Edison argued that it should be entitled to rely on the advice of its investment consultant with respect to the selection of the retail mutual funds. The Ninth Circuit’s discussion of this issue is particularly interesting in light of, e.g., subsequent innovations in DC outsourcing (see our recent article Outsourcing of defined contribution plan fiduciary function):
HFS [the investment consultant] frequently engages with the Investment Committee staff at Edison to help design and manage the Plan menu. It applies the investment staff’s criteria: (1) fund stability/management, (2) diversification, (3) performance relative to benchmarks, (4) expense ratio relative to the peer group, and (5) the accessibility of public information on the fund. HFS then approaches the Committee with options and discusses their respective merit with its members. And to keep Edison abreast of developments, it provides the Committee with monthly, quarterly, and annual investment reports. We offer this background to illustrate a point, which, though it should be unmistakable, seems to have eluded Edison in its briefing. HFS is its consultant, not the fiduciary. [Emphasis added.]
In these circumstances, the Ninth Circuit held, the plan fiduciary must “make certain that reliance on the expert’s advice is reasonably justified under the circumstances.” In agreeing with the lower court that the Edison fiduciaries did not satisfy this standard, the Ninth Circuit held:
[A] firm in Edison’s position cannot reflexively and uncritically adopt investment recommendations. … The trial evidence … shows that an experienced investor would have reviewed all available share classes and the relative costs of each when selecting a mutual fund. The district court found an utter absence of evidence that Edison considered the possibility of institutional classes for the funds litigated – a startling fact considering that supposedly the “expense ratio” was a core investment criterion.
ERISA generally bars claims “six years after (A) the date of the last action which constituted a part of the breach or violation, or (B) in the case of an omission the latest date on which the fiduciary could have cured the breach or violation ….” The lower court found that the decision to include three of the disputed funds in the fund menu was made more than six years before the Tibble lawsuit.
Oversimplifying somewhat, on appeal plaintiffs (and the Department of Labor in an amicus curiae brief) argued that the inclusion of the funds in the plan fund menu was a “continuing violation.” The Ninth Circuit rejected that argument, holding:
[Plaintiffs’] logic “confuse[s] the failure to remedy the alleged breach of an obligation, with the commission of an alleged second breach, which, as an overt act of its own recommences the limitations period.” … Characterizing the mere continued offering of a plan option, without more, as a subsequent breach would render [ERISA’s six-year statute of limitations] “meaningless and [could even] expose present Plan fiduciaries to liability for decisions made by their predecessors – decisions which may have been made decades before and as to which institutional memory may no longer exist.”
This is a technical issue and we are not going to go in to the legal details. This is, however, the specific issue the Supreme Court will be considering. And, if that Court finds for the plaintiffs, it will highlight and make more urgent the need for plan fiduciaries to regularly review past fund menu decisions.
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We will continue to follow these issues.