Close Close
Sign In
Newsletters
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards
Podcast Center Video Center Webcasts Resource Center Events
About ThinkAdvisor Contact Us Advertise With Us Asset & Logo Licensing Sitemap Terms of Service Privacy Policy Copyright © 2024 ALM Global, LLC. All Rights Reserved.
ThinkAdvisor

Portfolio > Mutual Funds

Supreme Court could redefine ERISA

By Nick Thornton

X
Your article was successfully shared with the contacts you provided.

When the Supreme Court hears arguments in Tibble vs. Edison International this winter, it will consider a case with the potential of redefining the Employee Retirement Income Security Act’s six-year statute of limitations. 

It is a considerably stripped down iteration of the lawsuit that started it all. 

Many of the fiduciary-duty claims against Edison – 25 were listed in the plaintiffs’ amended complaint – related to the poor performance of actively managed funds selected by Edison’s fiduciaries. Others related to revenue-sharing agreements with Edison’s record keeper, Hewitt Associates. 

In July 2009, however, U.S. District Court Judge Stefan Wilson issued a summary judgment tossing out most of the claims against the utility company, the sponsor of a $4 billion 401(k) plan.

But two issues remained for trial: whether Edison violated its duty of loyalty under ERISA by selecting retail mutual funds that charged higher fees and provided “favorable revenue-sharing agreements”; and whether Edison violated its duty of prudence in selecting a money market fund that allegedly charged excessive fees.

After a three-day trial, Wilson ruled Edison breached its duty of prudence by offering retail-class shares when identical, lower-cost institutional-class shares of same funds were available. Edison had added three mutual funds to the plan in 2002. 

Edison didn’t offer “any credible reason why the plan fiduciaries chose the retail share classes,” Wilson wrote in his ruling. 

He also found “no evidence that defendants even considered or evaluated the different share classes when the funds were added to the plan.” 

The trial revealed that in 2003, Edison did in fact switch one retail fund for an institutional fund, on the basis that doing so would be better for participants. Still, had Edison done its due diligence with respect to the funds added in 2002, plan participants would have saved “thousands of dollars in fees,” wrote Wilson. 

For as damning as that ruling was, Wilson chose not to extend the same reasoning to three other retail-share mutual funds Edison added before 2001. That’s because those funds were added more than six years before the plaintiffs filed their complaint. 

Neither the plaintiffs nor Edison was satisfied. Each side challenged aspects of Wilson’s ruling in an appeal before the 9th Circuit Court. 

The appellate court, as it turned out, had “little difficulty” upholding the lower court’s finding, finding that Edison’s lack of due diligence regarding institutional-share funds was “startling.” 

The plaintiffs wanted the fiduciary standard applied to the three funds that were added before 2001. But the appellate court didn’t budge on that aspect of the lower court’s ruling, because, it said, ERISA doesn’t permit “a continuing violation theory.” 

Under ERISA’s statut

e of limitations, a claim can’t be brought six years after the date of the last instance of a breach or violation, or in the case of an omission, six years after the latest date on which the fiduciaries could have corrected the violation. 

When the plaintiffs in Tibble vs. Edison go before the Supreme Court, they will argue that both lower courts misapplied ERISA’s statute of limitations. 

What follows is a closer look at their arguments, as outlined in papers filed with the Supreme Court. 

The question of what’s ‘timely’ 

According to the plaintiffs, under ERISA’s duty of prudence, Edison was obligated to periodically review the prudence of investments offered in its plan and to remove any imprudent investment. Each failure to do so constitutes a “breach or violation” of the law, and triggers a new six-year period in which participants can bring a claim. Edison, the plaintiffs say, conducted periodic reviews of its investment menu but failed to remove, as it should have, the institutional share funds “multiple times within the six years preceding the filing of this action.” 

The lower courts determined Edison did not have a duty to remove the institutional funds in question because the funds didn’t experience “significant changes” in performance. Plaintiffs will argue that standard is too narrow to apply. 

Errors by the 9th 

When the Court of Appeals held that the six-year statute of limitation period began in 1999 for the three funds in question, when they were first added to the plan, it “misconstrued” the plaintiffs’ argument, failed to consider the full scope of Edison’s fiduciary duties, and based its decision on “several legal errors,” according to the papers filed by the plaintiffs. 

The 9th Circuit assumed plaintiffs were hoping to claim damages outside the six-year statute of limitation, and that assumption determined how it applied the law. Plaintiffs will argue that they never intended to recoup damages outside the six-year limit. 

The Appellate Court also expressed concern that allowing claims relating to the continuing of an imprudent investment would lead to new class-actions against sponsors for decisions made long ago. The plaintiffs will argue against that reasoning, pointing to a provision in ERISA that protects current fiduciaries from the actions of former fiduciaries. 

ERISA’s statute of limitations clearly accounts for errors and omissions, which, the plaintiffs will argue, Edison created in not understanding the existence of institutional class options, and not swapping out the more expensive retail shares. The appeals court, the plaintiffs will argue, failed to consider that aspect of the law, “without explanation.”

ERISA’s purpose

The plaintiffs also will argue what other courts have established — that Congress enacted ERISA to “safeguard employees from the abuse and mismanagement of funds” in their retirement accounts. 

If the Supreme Court sides with Edison, the plaintiffs’ lawyers will assert, it will essentially be saying that a sponsor can offer imprudent investments, so long as those investments were selected more than six years ago. 

And that, the plaintiffs will argue, will fly in the face of ERISA’s purpose.

How will Edison argue? 

Edison will argue the appellate court decision was correct. 

When the 9th Circuit upheld the district court’s decision, it ruled in line with other circuit court decisions, “which have uniformly rejected efforts to apply a continuing violation theory to ERISA claims,” according to papers filed by Edison. 

In an amicus brief, the U.S. Solicitor General argued that the 9th Circuit’s decision was in conflict with other circuit courts regarding ERISA’s six-year limitation clause. 

But Edison’s attorneys say that claim “borders on frivolous.” The 4th and 11th circuits have upheld the six-year limitation. And they say fiduciaries have no legal obligation to remove funds when no materially new circumstances require their removal. 

Both lower courts in Tibble vs. Edison found Edison had monitored the funds throughout the six-year period, applied the appropriate level of prudence, and found no “materially changed circumstances” that would have obligated them to remove the retail shares in questions, they say. 

Like the plaintiffs, Edison will also invoke the spirit of ERISA and Congress’ intent when making their argument. “Congress did not enact ERISA to facilitate and promote costly benefit-plan lawsuits, especially stale lawsuits challenging plan decisions made many years earlier,” the attorneys for Edison wrote. 

“Just the opposite,” they said, “Congress enacted ERISA to promote plan formation by reducing litigation and other administrative expenses.”

A decision is expected around early summer.

See also:

$1.1T spending bill could further demise of private pensions

Eye on Congress, the courts and regulators: 6 questions answered

NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.