“ In its detailed decision, the court addresses a myriad of issues that are essential for plan fiduciaries in understanding how to limit and avoid liability under the Employee Retirement Income Security Act of 1974 (“ERISA”) going forward.”
On March 21, 2013, the Ninth Circuit issued its opinion in Tibble v. Edison International, affirming the district court’s decision in a case where participants alleged that 401(k) plan fiduciaries breached their duties of loyalty and prudence by including certain investment options in the plan, such as retail-class mutual funds, and engaging in revenue sharing. This decision resulted from the plaintiffs’ appeal of the district court’s partial grant of summary judgment to the defendants, and the defendants’ cross-appeal of the post-trial decision. In its detailed decision, the court addresses a myriad of issues that are essential for plan fiduciaries in understanding how to limit and avoid liability under the Employee Retirement Income Security Act of 1974 (“ERISA”) going forward.
Fiduciary Duty When Selecting
Retail-Class Mutual Funds
The Ninth Circuit upheld the lower court’s post-trial decision that the defendants acted imprudently by including retail-class shares of three mutual funds in the Edison 401(k) Savings Plan’s (“Plan”) investment menu without first investigating the possibility of similar, institutional-class alternatives. It rejected the defendants’ argument that they had reasonably relied on Hewitt Financial Services for advice because “independent expert advice is not a whitewash.” Moreover, it found that institutional-class shares for the three mutual funds at issue would have been more appropriate for the following reasons. First, all three mutual funds offered institutional shares that were 24 to 40 basis points cheaper. Second, there were no major differences in the investment quality or management for these two classes of funds. Third, even if the Plan could not meet these three funds’ investment minimum, it could have obtained a waiver because funds regularly waive such requirements for 401(k) plans with assets over a billion dollars, such as the Plan.
Statute of Limitations
The Ninth Circuit agreed with the district court that the six-year prong of the ERISA statute of limitations for the breach of fiduciary duty applied to the plaintiffs’ claims and started to run from when the initial decision was made to include the challenged investments as Plan options absent changes in conditions that prompted “a full due diligence review of the funds, equivalent to the diligence review Defendants conduct when adding new funds to the Plan.” With this decision, the court rejected the plaintiffs’ argument that their claims were timely so long as the challenged investments were in the Plan because there was a “continuing violation.” It also rejected the defendants’ argument that a three-year statute of limitations applied because the plaintiffs knew about the retail-class mutual funds through the Plan’s SPD and mutual fund prospectuses.
Safe Harbor Section 404(c)
In agreeing with the Department of Labor (“DOL”), the Ninth Circuit held that ERISA section 404(c) does not apply to a fiduciary’s selection of investments funds as part of an investment menu. According to the DOL, ERISA section 404(c) could not protect the defendants from losses that resulted from their decision to include the challenged funds because “the selection of particular funds to include and retain as investment options in a retirement plan is the responsibility of the plan’s fiduciary, and logically precedes (and thus cannot result from) a participant’s decision to invest in any particular option.” The court found the DOL’s interpretation reasonable because the fiduciary is in a better situation than the participant to prevent the losses that could arise from the inclusion of unsound investment options.
Standard of Review for Fiduciary Breach Claims
The Ninth Circuit, in joining the Third and Sixth Circuits, refused to limit the application of a deferential standard of review to only benefit claims. It held that the framework for reviewing disputes over plan terms — as set forth in key Supreme Court cases, Firestone Tire & Rubber Co. v. Bruch, Metropolitan Life Insurance Co. v. Glenn, and Conkright v. Frommert — also applies to all ERISA claims, including cases implicating fiduciary duties.
The Ninth Circuit held that the defendants did not violate the Plan document or ERISA section 406(b)(3) by using funds from revenue sharing to pay for some of the Plan’s administrative costs.
In applying the deferential standard of review because the Plan explicitly vested the Plan’s Benefits Committee with the “full discretion to construe and interpret [its] terms and provisions,” the court concluded that there was no abuse of discretion for several reasons. First, the revenue sharing practice did not explicitly conflict with the Plan’s plain language which stated that the “cost of the administration of the Plan will be paid by the Company” because a natural reading of “cost” meant the bills Hewitt Associates, the Plan’s service provider, sent to Edison. Also, there was nothing within the Plan prohibiting a third party from paying Hewitt Associates for its recordkeeping services. Second, the inclusion of these revenue sharing mutual funds increased the number of mutual fund options in the Plan. Third, the union discussed the use of these revenue sharing funds with Edison during union negotiations which amended the Plan to include mutual funds. Finally, the plaintiffs were made aware on at least seventeen occasions, such as through the Plan’s SPD, that Hewitt Associates used the funds from revenue sharing to pay for some of the Plan’s recordkeeping costs. The court also held that the defendants did not violate ERISA section 406(b)(3) because the DOL regulations under ERISA section 408(b)(2) exempt revenue sharing from the definition of consideration.
Inclusion of Mutual Funds, Short-Term Investment Fund and Unitized Stock Fund
The Ninth Circuit also rejected the plaintiffs’ claims that the defendants violated their duty of prudence by including mutual funds, a short-term investment fund (similar to a money market fund) rather than a stable value fund, and a unitized fund for participants’ investment in Edison stock in the Plan’s investment menu.
The Ninth Circuit joined the Seventh Circuit in refusing to accept a bright line rule that fiduciaries should only offer wholesale or institutional shares, instead of retail-class mutual funds, because there are several factors a fiduciary must consider in selecting a fund. Such factors included whether the lower cost alternative may have lower returns, higher financial risk, or offer fewer services. The court also found that the expense ratio range for the Plan’s approximate forty mutual funds of 0.03 to 2% was not out of the ordinary. However, the court stated that its decision assumed that the cost of revenue sharing did not drive up the selected fund’s overall expense ratio and that the defendants were not motivated to select the mutual funds because of the financial benefit of revenue sharing.
As for the short-term investment fund, the court held that the defendants were prudent because there was uncontroverted evidence, such as discussions on the pros and cons of a stable-value fund, showing that they had investigated the merits of this investment. Additionally, the inclusion of the unitized stock fund was not imprudent because the evidence showed that the defendants were vigilant in adjusting this fund when market conditions changed.
“… The Tibble appellate decision contains an abundance of points for ERISA plan fiduciaries to consider.”