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Portfolio > Mutual Funds

Decision to Impact Share Classes

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A recent Court of Appeals decision could force retirement-plan advisors to ensure they have selected the appropriate mutual-fund share class for their plans—a potentially daunting task, says Fred Reish, partner and chairman of the financial-services ERISA team at Drinker Biddle & Reath.

In Tibble v. Edison International, the Ninth District Court for the Central District of California on March 21 decided that “fiduciaries have an obligation to select appropriate share classes for their plans,” Reish says. “Closely related to that is the trial court’s admonition that fiduciaries must ask about the available share classes.”

Participants in the Edison 401(k) Savings Plan alleged in 2007 that 401(k) plan fiduciaries breached their duties by including certain investment options in the plan, such as retail-class mutual funds, and engaged in revenue sharing.

The Tibble decision, Reish explains, focused on “the reasonable expense ratios for plan investments,” and “ERISA imposes both a fiduciary rule and a prohibition on spending more than reasonable amounts for operating a plan, including the investment costs.”

However, Reish notes that “rather than looking at the evaluation of mutual fund expenses in the traditional way—that is, comparing expense ratios to those of other funds—the trial court found, and the appellate court agreed, that plans must use their purchasing power to select the appropriate share class.”

Melanie Waddell contributed to this report.


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