Compliance

Another Tibble vs. Edison Decision Handed Down In District Court

After a trip through the 9th Circuit and the U.S. Supreme Court, the case of Tibble vs. Edison has received another ruling in the district court where it was filed a decade ago, favoring the plaintiffs. 

By John Manganaro editors@strategic-i.com | August 17, 2017
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The latest ruling in Tibble vs. Edison comes out of the U.S. District Court for the Central District of California, applying the now-famous “distinct duty to monitor” standard set forth by the U.S. Supreme Court on an appeal of the very same litigation.   

By way of background, the pioneering lawsuit has played out over the last full decade, filed first in the California district court and eventually reaching all the way up to the Supreme Court of the United States after an appellate ruling.  

Readers of PLANADVISER will recall the Supreme Court’s decision was taken to establish clearly that the “ongoing duty to monitor” investments is a fiduciary duty that is separate and distinct from the duty to exercise prudence in the initial choice of an investment. The big practical result was that plan sponsors can no longer rely on ERISA's statute of limitations to protect themselves from accusations of potentially imprudent investment decisions made in the past when the investment options in question persist on the menu to this day. However the SCOTUS decision declined to apply that determination to the facts of the case at hand, leaving the lower courts to put into practice the standard it had put forth.

Now that a new ruling has emerged it seems that the SCOTUS and appellate court instructions have led the district court to side with the plaintiffs, ruling that defendants breached their fiduciary obligations of prudence and monitoring in the selection of all 17 mutual funds at issue. Damages will be calculated from 2011 to the present, the decision states, “based not on the statutory rate, but by the 401(k) plan’s overall returns in this time period.”

The ruling examines in detail the process surrounding the adoption of 14 mutual funds that the plaintiffs contend should have been switched by the defendants from retail to institutional shares on August 16, 2001, the beginning of the statutory period. An additional three mutual funds in dispute had their institutional-class shares become available later, during the statutory period, and had no statute of limitations questions.

In the previous bench trial, the district court “rejected the contention that the defendant was justified in selecting the retail-class shares because these shares had more public information available, because participants would be confused by proposed changes in the switch from retail to institutional shares, or because the plan did not qualify for the investment minimum required of institutional share classes.” In the current case, the defendants do not revive these same arguments.

“Instead, they concede that they were in the wrong in not considering institutional shares,” the decision states. “They argue, however, that a hypothetical prudent fiduciary who did consider the institutional shares would have still invested in at least some of the retail share classes. Defendants assert that during collective bargaining negotiations between Edison and plan participants in 1999, the parties agreed—or, at least, understood—that Edison would invest in funds with revenue sharing in order to defray some of the recordkeeping costs Edison was paying Hewitt Associates.”

The defendants further contended that “the unions understood and accepted this bargain … Because the unions accepted this bargain, and because for most of the 17 funds at issue, fees charged to plan participants by the ‘retail’ class were the same as the fees charged by the ‘institutional’ class, net of the revenue sharing paid by the funds to defray the plan’s recordkeeping costs, defendants argue that investment in the retail share classes was prudent.”

NEXT: Prudence and investment monitoring