In past articles in this Blog I reported on decisions of the 9th Circuit Court of Appeals and ultimately the U.S. Supreme Court dealing with a class action for breach of fiduciary duty for selecting retail mutual funds in 1999 for which lower costs institutional funds were available. http://benefitsnotes.com/2013/04/ninth-circuit-decides-selection-of-retail-mutual-funds-was-a-breach-of-fiduciary-duty/ ; http://benefitsnotes.com/2015/05/supreme-court-401k-plan-fiduciaries-have-an-ongoing-duty-to-monitor-2/ The case stalled when the 9th Circuit Court of Appeals and the U.S. Supreme Court considered the statute of limitations issue – whether a fiduciary breach only occurs at the time of the original act or omission or whether the failure to rectify an earlier breach amounts to a continuing breach.
The U.S. Supreme Court in Tibble vs. Edison International 135 S. CT. 1823 (2015) the Supreme Court found that the ERISA six year statute of limitations would not be a bar to a breach of fiduciary duty which occurred outside of the six year statute if actions could have and should have been taken within the statute of limitations period to remedy an earlier breach. The Supreme Court sent the case down to the 9th Circuit to reconsider whether the defendant investment committees had breached their fiduciary duty in failing to move the retail mutual funds into lower cost institutional share classes which were available or in the case of three funds which were added during the statute of limitations period, when such institutional shares became available. The 9th Circuit remanded the case back down to the Federal District Court directing the lower court to reconsider the facts in light of the Supreme Court’s decision and make a ruling.
On August 16, 2017, Judge Steven V. Wilson of the U.S. District Court Central District of California once again delivered a ruling in favor of Tibble and the other employee participants in the Edison International 401(k) Savings Plan. He ruled that of the 17 mutual funds selected in March of 1999, all of these funds remained in the Plan beyond August 16, 2001 the first date for consideration under the ERISA 6-year statute of limitations. Judge Wilson found that the institutional share classes for 14 of the funds were available in 2001 and that the institutional class shares in the 14 mutual funds were identical to the retail class shares except that the retail shares charged much higher fees. The Court found that a prudent fiduciary in similar circumstances would always have selected the lower cost institutional funds and that the failure to convert or to inquire as to waiver of institutional share requirements was a breach of the duty to monitor Plan investments. There was considerable discussion in the various court decisions about the fiduciaries’ obligations to periodically request waivers of minimum eligibility requirements for institutional share classes. One of the witnesses in trial, Daniel Esch (now of Cap Trust formerly of Defined Contribution Advisers), testified that he had periodically received such waivers for plans with as little as $50 million in the trust.
The defendants introduced an argument at the rehearing that since the higher cost retail funds included revenue sharing that was available to the Plan for payment of the Hewitt Associates recordkeeping fees, the participants were not harmed as the Company could have imposed these costs on the participants in accordance with the terms of the Plan at any time. The Court rejected this argument as speculative.
The defendants also argued that the fiduciaries should have a reasonable time to implement the share class change once a decision is made to do so. They suggested two to five months as a reasonable time period. The District Court rejected that argument and ruled based on one of the trial experts testimony that share class changes can be made “in a day”. The Court ruled that these changes should have happened immediately.
The lower Court found that the damages to the class participants on the difference between the fees on the different share classes would be calculated for the open period of the statute of limitations 2001 forward. During the period 2001 through 2011 the parties stipulated that a damages amount of just over $7.5 million was the differential in the fees and the related earnings of the respective mutual funds. The Court ruled that for 2011 to the present, after the mutual funds were all removed from the Plan, the earnings to be applied to the damage amount would be the overall Plan rate of return including returns of participants participating in the brokerage window.
As I have stated in prior articles, members of plan investment committees have an affirmative duty to monitor the investment performance of offered fund investments and in addition monitor fees charged against the Plan assets which impact the ultimate return to the participants. This is an ongoing fiduciary duty and that selection of fund managers and Plan investment options is not a “set and forget” decision.