0Ninth Circuit Addresses Numerous ERISA Issues in Affirming District Court’s Rulings in Tibble Case
In Tibble v. Edison International, Nos. 10-56406, 10-56415, 2013 WL 1174167, No. 11-56628, 2013 WL 1150788 (9th Cir. Mar. 21, 2013), participants in a 401(k) plan brought a class action against the employer sponsoring the plan (and various individuals and entities affiliated with the employer), asserting that the selection of investment options made available to them under the plan violated ERISA fiduciary requirements. As we previously reported in the September 2010 ERISA Litigation update, available here, the U.S. District Court for the Central District of California had dismissed most of the participants’ claims, but (after a bench trial) held that the defendants had breached their duty of prudence under ERISA by including within the plan’s investment menu the retail class shares, rather than the institutional class shares, of three specific mutual funds, absent any evidence that the defendants considered the alternative share classes or that the plan benefitted from the retail share classes. In reviewing the district court’s rulings, the U.S. Court of Appeals for the Ninth Circuit addressed a number of ERISA issues that frequently arise in litigation challenging the selection of investment options for participant-directed investment plans.
The Court of Appeals affirmed the district court’s holding that claims challenging the inclusion of investment options first selected for the plan’s menu more than six years before the filing of the complaint were barred by ERISA’s statute of limitations – which, in pertinent part, provides that ERISA fiduciary breach claims may not be brought “more than six years after the last action that constituted part of the breach.” ERISA § 413(1)(A). The court rejected the “continuing violation theory” advanced by the plaintiffs and the Department of Labor as amicus curiae (“DOL”), under which the claims would be timely so long as the investment options in question remained available under the plan during the six year limitations period. The court concluded that such a result “would make hash out of ERISA’s limitation period and lead to an unworkable result.”
The defendants did not fare as well in seeking dismissal, on statute of limitations grounds, of claims challenging the inclusion of certain options utilizing mutual fund retail class shares that were added to the plan’s menu less than six years, but more than three years, before commencement of the action. The defendants argued that these claims were barred by the ERISA statute of limitations provision that precludes claims brought more than “three years after the earliest date on which the plaintiff had actual knowledge of the breach.” ERISA § 413(2). According to the panel of the Ninth Circuit, the “breach” with regard to the claims involving the retail shares was not based simply on their inclusion in the plan’s investment menu, but focused rather on the defendants’ failure to investigate alternatives to offering retail shares as an option. Because the evidence did not establish that the plaintiffs had – more than three years before the filing of the complaint – “actual knowledge” of the defendants’ process of selecting the retail shares as an option, and their failure to investigate alternatives, the three-year statute did not bar those claims.
The defendants also argued that the participants’ claims challenging the selection of investment options were proscribed by ERISA § 404(c), which provides a safe harbor from fiduciary liability in cases where participants exercise investment control over their defined contribution plan accounts, and certain conditions are satisfied. The Ninth Circuit noted, however, that under the relevant DOL regulation the Section 404(c) safe harbor protects fiduciaries from liability only from losses that are the “direct and necessary result” of the participants’ exercise of control, see 29 C.F.R. § 2550.404c-1(d)(2), and that the DOL had specifically stated in the regulation’s preamble that a fiduciary’s selection of investment options is not a direct or necessary result of a participant’s investment direction. The Court of Appeals concluded that the position of the DOL stated in the preamble (and reiterated by the DOL consistently since the adoption of the regulation) was an interpretation of Section 404(c) that is entitled to “Chevron deference,” see Chevron, U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984). Because the court found the statutory language of Section 404(c) ambiguous, and the DOL’s position to be reasonable, it held that the safe harbor from fiduciary liability did not cover the defendants’ selection of the retail class shares as an option for the plan’s investment menu.
The plaintiffs prevailed on the merits of their retail class share claims relating to three specific mutual funds. The Ninth Circuit affirmed the district court’s holding that the defendants had breached their duty of prudence under ERISA § 404(a)(1) when, without sufficient investigation, they selected for the plan’s investment menu retail class shares of funds that also offered institutional class shares, even though there were no meaningful differences in the investment quality or management of the fund when purchasing the institutional shares rather than the retail shares, and the fees and expenses associated with the retail shares were 24 to 40 basis points more expensive than those of the institutional shares. The court rejected the defendants’ argument that they reasonably relied on their investment consultant in selecting the retail shares, because there was “an utter lack of evidence that [the defendants] considered the possibility of institutional classes for the [relevant] funds” and the defendants presented no evidence that their consultant had specifically recommended investment in retail shares. The court below, and the appellate court, did not address in this context the benefits to the plan of use of revenue sharing through these funds to reduce or eliminate other plan expenses.
The participants failed, however, in their general challenge to the use of revenue sharing payments made by the plan’s investment options to compensate the plan’s recordkeeper. They argued that this practice violated a plan provision stating that “[t]he cost of the administration of the Plan will be paid by [the sponsoring employer].” They also asserted that the defendants violated ERISA’s anti-kickback provision – Section 406(b)(3) – by selecting investment options that paid revenue sharing which reduced the employer’s obligation to pay the plan’s administrative expenses. The court noted, however, that the plan’s benefits committee had discretion under the plan to construe its terms, and that the committee had interpreted the relevant plan language as obligating the employer to pay plan administrative costs “net of any adjustments” such as revenue sharing. The court found this interpretation of plan language entitled to deference under Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989) and its progeny, and therefore held that the use of revenue sharing to compensate the recordkeeper (and to reduce the employer’s costs) violated neither the plan document nor ERISA § 406(b)(3).
The Ninth Circuit also affirmed the district court’s dismissal of the participants’ remaining claims, including: claims that the defendants violated their duty of prudence by including mutual funds (rather than only collective funds or single plan separate accounts) in the plan’s investment menu; claims that the mutual funds made available under the plan charged excessive fees; a claim that the selection of a short-term investment fund (“STIF”), rather than a stable value fund, was imprudent; and a prudence challenge to the plan’s use of a “unitized” employer stock fund (rather than direct investment in employer stock). Significantly, the Court of Appeals also upheld the district court’s decision not to award attorneys’ fees or costs to either party.
0Fourth Circuit Affirms Dismissal of Claims and Summary Judgment in Case Challenging Financial Services Company’s Use of Proprietary Products in Its Retirement Plans
In David v. Alphin, 704 F.3d 327 (4th Cir. 2013), participants in a defined contribution plan and a defined benefit plan sponsored by a bank brought putative class claims under ERISA alleging breaches of fiduciary duty and prohibited transactions in connection with the selection of bank-affiliated mutual funds for the plans. Specifically, the plaintiffs alleged that the defendants breached their fiduciary duties of prudence and loyalty by selecting and failing to remove bank-affiliated funds from the plans despite poor performance and higher fees than other viable options. They further alleged that the defendants caused the plans to enter into transactions with the funds that were subject to conflicts of interest.
The U.S. District Court for the Western District of North Carolina dismissed all claims related to the defined benefit plan for lack of standing under Article III of the U.S. Constitution. After the completion of discovery, the district court granted summary judgment to the defendants as to all remaining counts on statute of limitations grounds.
The Fourth Circuit affirmed both rulings. With respect to claims concerning the defined benefit plan, the Fourth Circuit found that, under the plan, the plaintiffs were entitled to receive only a fixed level of retirement benefits. As a result, any risk to the plan’s investments resulting from the defendants’ investment selection had no effect on the participants’ benefit rights, particularly where the plan was over-funded. Accordingly, the court held that the plaintiffs could not demonstrate actual harm sufficient to show an injury-in-fact as required for constitutional standing under Article III. The court rejected arguments advanced by the Department of Labor in an amicus brief in support of the plaintiffs, including the argument that the plaintiffs had representational standing to sue with respect to injuries to the plan even if they themselves had suffered no harm.
With respect to claims concerning the defined contribution plan, the Fourth Circuit held that the district court correctly concluded that the plaintiffs’ claims were time-barred under ERISA’s statute of limitations—which, in relevant part, bars actions commenced more than six years after the date of “the last action which constituted a part of the breach.” Specifically, the court concluded that the alleged prohibited transactions and breaches of duty could be based only on the initial selection of the challenged funds for the plan. Where there was no dispute of fact that such initial selection occurred more than six years prior to the filing of the complaint, ERISA’s six-year limitation period barred the claims. In this regard, the court rejected the plaintiffs’ argument that the challenged conduct was not the initial selection of the funds, but the ongoing failure to remove the funds. The court held that the initial inclusion of bank-affiliated funds on the plan’s investment lineup “triggered the limitations clock."
The Fourth Circuit also affirmed the district court’s decision to dismiss the complaint with prejudice on the ground that the plaintiffs had not moved to amend the complaint and had already filed four complaints in the matter. The plaintiffs’ petition for rehearing and/or rehearing en banc was subsequently denied.
0Second Circuit Vacates Dismissal of Stock Drop Claim As to Plan That Neither Required Nor Encouraged Holding of Employer Stock
In two companion decisions, the Second Circuit Court of Appeals affirmed in part, and vacated and remanded in part, a decision by the United States District Court for the Southern District of New York dismissing all claims as to the inclusion in two 401(k)-style plans that allowed participants to invest in the stock of the sponsoring employer. Taveras v. UBS AG, 708 F.3d 436, No. 12-1662, 2013 WL 692720 (2d Cir. Feb. 27, 2013).
In Taveras, four former employees of a financial services company sued their former employer and related individuals and entities regarding investments in the employer’s stock made by two company-sponsored retirement savings plans. The plaintiffs alleged that the stock investments were imprudent due, in part, to the sponsoring employer being on the “brink of collapse” as a result of alleged sub-prime exposure in 2007 and 2008. The plaintiffs purported to sue on behalf of a class of other participants and former participants of the two plans during a period when the price of the stock fell 74% between April 26, 2007 and October 16, 2008. The district court dismissed all claims, holding, among other things, that the plans’ fiduciaries were entitled to a presumption of prudence under Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995), and that the complaint did not sufficiently plead the “dire circumstances” necessary to meet that standard. The Second Circuit Court of Appeals affirmed dismissal of the claim of breach of the duty of prudence as to one plan, the 401(k) Plus Plan (“Plus Plan”), but vacated and remanded as to the other, the Savings and Investment Plan (the “SIP”).
As to the Plus Plan, the appellate court held that the presumption of prudence applied given that the plan document stated that one purpose of that plan was to provide employees the opportunity “to acquire” the company’s stock, and elsewhere stated that one of the initial investment options for the Plus Plan “shall be” a fund consisting of the employer’s stock — even though the plan also allowed the fiduciary committee to change options. Having found that the presumption of prudence applied given that plan language, the court in its companion order held that the presumption was not defeated by the pleaded allegations. The court acknowledged that it had not “defined precisely the contours of what constitutes a ‘dire’ situation sufficient to defeat the presumption of prudence,” but it made clear that a “showing that the company made bad business decisions is insufficient to show that it was in a ‘dire situation’” (internal quotations omitted). The court did say that any dire circumstances must be those that would have been “objectively unforeseeable” by the employer when it established the plan. It held that the pleadings at issue here did not meet that standard.
The Second Circuit, however, vacated dismissal of the prudence claim relating to the SIP and remanded for further proceedings. The SIP only mentioned the existence of an employer stock fund, and neither mandated such a fund nor strongly encouraged it. Under those circumstances, the court held that no presumption of prudence applies to the holding of employer stock because the policy underlying the Moench presumption, and the Second Circuit’s earlier Citigroup decision (reported previously in the December 14, 2011 ERISA Litigation Update at the link available here), did not apply given that there was no need to balance a tension between a fiduciary’s duty of prudence and an obligation under plan documents (encouraged by ERISA) to offer investment in employer stock.
As to both plans, the appellate court affirmed dismissal of other claims. The court held that statements in SEC filings (relating to corporate prospects effecting the company stock value) by the defendants were not actionable under ERISA because they were not made in an ERISA fiduciary capacity. Similarly, the court followed the settled principle that an “alleged ERISA fiduciary's mere officer or director status, taken alone, is insufficient to state a claim for conflict of interest” that would violate ERISA.
Jamie Fleckner will present at the following conferences:
Strafford Publications’ Defined Benefit Pension Plan Litigation – webinar
May 7, 2013
ALI-CLE Collective Trust Funds Today: Recent Developments in Banking, SEC, and ERISA Regulation and Compliance
May 9, 2013
New York, NY
2013 PLANSPONSOR National Conference
June 4-6, 2013
James S. DittmarRetired Partner
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