Alert July 20, 2010

Judge Finds Breach of ERISA Fiduciary Duty Where Plan Fiduciary Failed to Consider Institutional Share Class Mutual Funds for Large 401(k) Plan

In an 82 page order dated July 8, 2010, released on July 12, 2010, Judge Wilson of the United States District Court for the Central District of California held that fiduciaries of a 401(k) plan holding between $2 and $3 billion in assets breached ERISA’s duty of prudence as to three of nearly fifty investments made available to plan participants where the fiduciaries utilized retail mutual funds as opposed to available institutional class shares for those three funds.  The amount of damages is to be decided by the court at a later date.  Tibble v. Edison International, No. CV 07-5359 SVW (AGRx), 2010 WL 2757153 (C.D. Cal. Jul. 8, 2010).

Edison is one of sixteen nearly identical class action suits brought by a St. Louis plaintiff’s firm challenging under ERISA fees paid by large 401(k) plans.  Plaintiffs are 401(k) plan participants.  Defendants include the plan sponsor and those corporate committees and individuals employed by the sponsor with authority over the 401(k) plan.  Judge Wilson conducted a three day trial from October 20-22, 2009 on two limited issues that remained in the case after he had granted Defendants’ motion for summary judgment in large part in orders dated July 16, 2009 and July 31, 2009. 

As to the first trial issue, the court held that Defendants acted imprudently by selecting retail as opposed to institutional shares for three of the mutual funds challenged by Plaintiffs.  The court found that the Defendants had not evaluated or considered the existence of alternative share classes for these funds and that the selection of retail share classes under the facts adduced at trial was objectively imprudent where “the institutional share classes offered the exact same investment at a lower cost to the Plan participants.”  The court further ruled that defendants’ reliance on their investment consultant was not a defense to the charge that they acted imprudently.  Had the plan been designed to provide that all such plan expenses were to be paid by the plan, rather than the plan sponsor, the fiduciaries might have been able to justify the prudence of selecting the retail share classes based upon an additional argument that was not addressed in the court’s ruling:  that the benefit that the plan (not the plan sponsor) derived from the revenue sharing justified payment of the higher fees with respect to the retail classes.  As such, this decision underscores the importance of designing such a plan so as to impose the cost of plan administration on the plan, not the plan sponsor.

The plaintiffs also claimed that the selection of these three share classes was a violation of ERISA’s duty of loyalty, because these classes generated payments of revenue sharing that were applied to reduce plan expenses that would otherwise have been borne by the plan sponsor.  The court concluded that defendants did not act disloyally by allowing the challenged mutual funds to be offered as plan investment options, where the proof at trial showed that defendants’ actions were not motivated to any extent by the existence of such revenue sharing payments. 

As to the other issue at trial, the Court held that it was not imprudent to allow investment in a money market fund that charged a management fee between 8 and 18 basis points.  The court held that the fund charged fees in a reasonable range, and, in reliance on Hecker v. Deere & Co., 556 F.3d 575, 586 (7th Cir. 2009), stated that: “The fact that it is possible that some other funds might have had even lower [expense] ratios is beside the point; nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund (which might, of course, be plagued by other problems).”