The Trouble with Tibble: What If You Don't Know What You Don't Know? By: Eric Paley

We’ve all been guilty of willful ignorance at one time or another. “I don’t like brussel sprouts,” even though you’ve never come close to eating them. “That book is boring”, though you’ve never actually cracked the cover. “I don’t think the heavy stuff’s gonna come down for quite awhile,” even as a torrential downpour tears at your face. Willful ignorance is about burying your head in the sand – believing what you want to believe and refusing to open your mind to the alternative.

When we engage in willful ignorance, we can’t expect much sympathy from others if the tide turns against us. Ignore reality at your own peril.
But to my mind, Tibble v. Edison International isn’t about willful ignorance. It’s about sheer ignorance. Naḯveté. “What, me worry?” à la Alfred E. Neuman. (That’s a Mad magazine reference for you young’uns. Go Google it.) And that’s why I can’t help but feel a tad sorry for the members of the Edison Investment Committee.

What if they truly didn’t know what they didn’t know?

They certainly seemed to have the best of intentions. The Ninth Circuit’s decision tells us that Edison had long contracted with a reputable firm, Hewitt Financial Services, for investment consulting advice. HFS met frequently with the Committee to ensure Edison’s menu of 401(k) plan investment options continued to satisfy the Committee’s chosen criteria. And HFS even provided the Committee monthly, quarterly, and annual investment reports. Good stuff, right? Not good enough, apparently.

The court chastised Edison “to illustrate a point, which, though it should be unmistakable, seems to have eluded” the company. HFS was merely a consultant, experts though they may have been in their field. A fiduciary, like the Committee, cannot unreasonably rely upon an expert’s advice. The law demands more.
And there’s the rub. The brave men and women of the Edison Investment Committee never had a chance, and I want to believe they didn’t even see the coming storm. HFS recommended the inclusion of retail share classes for mutual funds on the Edison 401(k) plan investment menu, and the Committee blindly accepted HFS’s advice without considering whether cheaper institutional share classes might be available. Did the Committee members even appreciate what they were doing? Did they understand they were getting retail shares? Did they know what retail shares were? Did they have even the foggiest notion there might be an animal called an institutional share? Did they know it was less expensive than a retail share?

Having sat down with more than my fair share of retirement plan committee members over the years, I tend to doubt it. To be clear, I do not question the intelligence of these folks one iota. I’m sure they were every bit as smart and talented as anyone else at the company, and they approached their Committee charge with the utmost professionalism. But being smart and talented doesn’t make you an expert in everything. Remember, Einstein supposedly couldn’t tie his own shoes.

The law demands more. It’s right there in black-and-white. (Section 404(a)(1)(B) of ERISA, for those of you who care about such things.) A fiduciary must discharge its duties with respect to a plan “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” That’s a pretty high standard – actually, the “highest known to law,” as a federal appeals court once said.

And so, as badly as I feel for the members of the Edison Investment Committee, it won’t change the result. As the Ninth Circuit said, the Committee should have “reviewed all available share classes and the relative costs of each when selecting a mutual fund.” This is especially true, “considering that supposedly the ‘expense ratio’ was a core investment criterion.” And yet, despite having ample opportunity to do so, Edison presented no evidence the Committee ever did any of this. The law expected them to act as experts, and they failed to meet the challenge.

I have given countless speeches on fiduciary responsibility over the years, and my parting advice to attendees is always the same: though nothing in ERISA requires a plan’s committee to engage an outside fiduciary adviser, it’s strongly recommended. Tibble vindicates me, for all those who dared to question the wisdom of my words. It matters not that your heart is full, if your mind is empty. Sheer ignorance can be downright costly and dangerous in the face of a legal standard that demands expertise.

“What, me worry?” Oh Alfred, poor, poor Alfred …If you only knew. 

Eric Paley

Eric Paley is a member of Nixon Peabody’s Employee Benefits & Executive Compensation team. He focuses his practice on the law and regulations governing retirement plans, welfare plans, nonqualified deferred compensation plans, and equity compensation plans. A significant portion of Eric’s practice also...

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