The Court of Appeals for the Ninth Circuit recently affirmed the ruling of a federal district court that fiduciaries for a 401(k) plan were imprudent in deciding to include retail-class shares of three specific mutual funds in the plan menu of investment fund options because they failed to investigate the possibility of institutional-share class alternatives. The unchallenged findings in this case with respect to the fiduciary breach are that during the relevant time period (1) all three of the litigated fund options offered institutional-class options in which the 401(k) plan almost certainly could have participated, (2) the institutional-class fund options for those funds were in the range of 24 to 40 basis points cheaper than the retail class options the 401(k) plan offered to participants, and (3) there were no salient differences in the investment quality or management of the institutional-class options and the retail class options. Despite strenuous arguments from the plan fiduciaries that they reasonably depended on their investment consultant for advice about which mutual fund share classes should be selected for the plan, the court held the plan fiduciaries cannot reflexively and uncritically adopt investment recommendations. In the absence of evidence that the plan fiduciaries themselves considered the possibility of institutional classes for the funds litigated, or that the investment consultant engaged in a prudent process that considered different share classes, the Ninth Circuit had little difficulty agreeing with the district court that the plan fiduciaries did not exercise the “care, skill, prudence, and diligence under the circumstances” that ERISA demands in the selection of the retail mutual funds.
To be clear, the court’s ruling does not go so far as to suggest that retail-class investment fund options should never be offered. In fact, the court specifically declined to endorse such a bright-line rule. Nonetheless, plan fiduciaries must be engaged in a prudent process that critically evaluates institutional-class alternatives for the investment funds selected for the plan. Various performance factors can come into play in deciding between different share classes, and sometimes offering retail-class shares is appropriate. But a failure to investigate and evaluate the availability, performance, expenses, etc. associated with different share classes is not prudent. (Tibble v. Edison Int’l, 9th Cir. 2013)