A decade-long court case on whether Edison International’s financial advisors and investment committee breached their fiduciary duties to retirement plan participants came to an end Wednesday when the U.S. District Court for the Central District of California ruled that the firm breached its fiduciary obligations by not switching participants to lower-fee institutional mutual fund shares.
In the matter of Tibble v. Edison International, the court ruled that the defendant breached its fiduciary obligations of prudence and monitoring in the selection of all 17 mutual funds at issue, with damages to be calculated “from 2011 to the present, based not on the statutory rate, but by the 401(k) plan’s overall returns” during this period.
“After 10 years of litigation, and a unanimous favorable ruling by the U.S. Supreme Court, we are pleased that the court agreed with our position,” said Jerry Schlichter of Schlichter, Bogard & Denton, the attorney for the plaintiffs, in a statement. “We look forward to continuing our work on behalf of the employees and retirees involved in this case, so that they may soon see a resolution and find relief.”
Tibble v. Edison International is the only 401(k) excessive fee case taken by the Supreme Court.
The case started in the U.S. District Court for the Central District of California and made its way to the U.S. Supreme Court in 2015. The high court ruled unanimously in favor of the employees.
After the Supreme Court ruling, the Court of Appeals for the Ninth Circuit ruled unanimously, in a 10-judge en banc decision, in favor of plaintiffs that the District Court should award damages to the plaintiffs.
“With yesterday’s ruling, the employees and retirees move one step closer to a final judgment and damages awarded,” Schlichter said.
George Michael Gerstein, counsel with Stradley Ronon in Washington who specializes in ERISA, noted in response to the Tibble decision that documenting the process for choosing fund options will be even more important in light of the Department of Labor’s fiduciary rule.
“A prudent process is manifestly important,” Gerstein said. “Regardless of whether one is a discretionary or non-discretionary fiduciary, there should be a methodology to fiduciary decisions that is clear and determinable. It is a good position to be in if you can reverse-engineer a decision, and show its incremental discussion items along the way were done in a manner that was reasonable. This approach also applies to satisfying your duties under the new fiduciary rule, whether that’s the Obama version or ultimately a new Trump version.”
As the ruling states, at issue in the excessive fees case are 17 mutual funds that defendants selected as plan investment options in March 1999.
“For each of the 17 funds, defendants initially selected the retail shares instead of the institutional shares, or failed to switch to institutional share classes once one became available,” the ruling states.
Institutional share classes are available to institutional investors, such as 401(k) plans, and may require a certain minimum investment, but they often charge lower fees (i.e., a lower expense ratio) because the amount of assets invested is far greater than the typical individual investor.
The investment management of all share classes within a single mutual fund is identical, and managed within the same pool of assets.
In other words, the ruling continues, “with the exception of the expense ratio (including revenue sharing), the retail share class and the institutional share class are managed identically. Plaintiffs contend that defendants breached their duty of prudence by not switching the retail shares of the 17 funds at issue to institutional shares.”