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.