The Ninth Circuit rejected a majority of the plaintiffs’ claims against Edison International, the southern California electrical utility, for mismanagement of Edison’s 401(k) plan, dampening the glow on the plaintiffs’ only successful claim for a breach of fiduciary duty.  See Edison Int’l v . Tibble, No. 10-56406 (9th Cir. March 21, 2013).

The only significant finding in the plaintiffs’ favor came when the Ninth Circuit agreed that Edison 401(k) plan fiduciaries breached their duties because they included retail-shares of three mutual funds without first investigating the possibility of including institutional-share class alternatives.

While retail-class mutual funds are not a “categorically imprudent” investment option, the Ninth Circuit held that thefiduciaries’ failure to investigate the possibility of lower-fee institutional-class funds constituted a breach of their fiduciary duty of prudence.  This breach cost Edison $370,000.

But losing the battle didn’t mean that Edison lost the war.  The plaintiffs lost on their theory that including a unitized fund for employees’ investment in company stock was imprudent.

They also lost on their statute of limitations “continuing violation theory.”  Instead, the Court found that ERISA’s 6-year statute of limitations begins to run when the decision to include the litigated investment in the plan was made.   

Siding with the Third and Sixth circuits, the Ninth Circuit applied an abuse-of-discretion review to the fiduciaries’ decisions because the plan document confers interpretive authority on the plan administrator.  Under this deferential standard of review, the Ninth Circuit also affirmed the district court’s ruling that Edison did not act imprudently by including specific investment options in the plan—namely, a short-term investment similar to a money market account and a unitized fund for investment in employer stock.

The Ninth Circuit also rejected the plaintiffs’ claim that Edison’s revenue-sharing arrangement violated ERISA and the governing plan document. Under a “commonsense reading” of the plan, Edison merely had an obligation to pay the plan’s administrative costs.  This did not constitute a prohibition on allowing Hewitt’s recordkeeping fees to be paid from a third party.

Another small, but hollow victory, for the plaintiffs was when the Ninth Circuit found that ERISA Section 404(c)’s safe harbor provision did not apply to Edison’s decision.  The Ninth Circuit found that because selection of the challenged investment was not a product of the participant’s or beneficiary’s exercise of control the safe harbor couldn’t apply.  In so holding, the Ninth Circuit found DOL’s interpretation of 404(c) to be afforded administrative deference.  

This opinion can assist counsel representing plan fiduciaries to know what evidence to present because had Edison “made a showing that HFS [the Plan’s financial consultant] engaged in a prudent process in considering share classes this might have been a different case.”  The Ninth Circuit found that Edison did not present evidence on this issue and therefore the Edison fiduciaries breached their duty of reasonable reliance upon their consultants’ recommendation on class shares.

Plan fiduciaries in the Ninth Circuit also can breathe easier after six years from the date fund decisions are made because the time for plaintiffs to bring breach of fiduciary claims will have run.

Notably, in light of the Court’s rejection of the safe harbor exception for plan fiduciaries when deciding a plan’s investment options, Plan fiduciaries should be sure to probe the plan’s financial advisors and consultants as to why their investment recommendations are prudent.  This opinion also guides plan fiduciaries to present every crumb of evidence at trial that was considered by the plan fiduciaries, and their consultants, when deciding between shares of mutual funds.