Court Buys Retail vs. Institutional Share Fee Claims

Even though the bulk of their claims were thrown out, 401(k) participants still won a key legal victory in a suit against their employer when a judge ruled the selection of three retail-class funds constituted a fiduciary breach. 

U.S. District Judge Stephen V. Wilson of the U.S. District Court for the Central District of California declared that Southern California Edison (SCE) and its plan fiduciaries violated the duty of prudence imposed by the Employee Retirement Income Security Act (ERISA) by not properly investigating the differences between selecting retail shares instead of institutional shares.   Wilson’s 82-page ruling in Tibble v. Edison International was significant because the court accepted an often-advanced claim in 401(k) excessive fee suits that fiduciaries violate their ERISA-imposed duties by not adding less-costly institutional shares to their plans.  

“Had the Investments Staff and the Investment Committees considered the institutional share classes when adding these funds in 2002 and weighed the relative merits of the institutional share classes against the retail share classes, they would have realized that the institutional share classes offered the exact same investment at a lower cost to the Plan participants,” Wilson contended. “Thus, Defendants would have known that investment in the retail share classes would cost the Plan participants wholly unnecessary fees.”  

In regards to the three funds that were the focus of the fiduciary breach finding, Wilson turned aside defendants’ arguments that the fact they were taking the advice of Hewitt Financial Services (HFS) when they opted for the retail shares negated any fiduciary breach. (The three funds were the William Blair Small Cap Growth Fund, the MFS Total Return Fund, and the PIMCO (Allianz) RCM Global Tech Fund.)  

Wilson commented:   “While securing independent advice from HFS is some evidence of a thorough investigation, it is not a complete defense to a charge of imprudence.”  

The court likewise rebuffed defense claims that they couldn’t look further into institutional shares because of mandatory investment minimums placed on those shares. Wilson argued that the fiduciaries should have asked for a waiver of the minimums and noted that the fund managers involved had never turned down a similar request from a similarly sized plan (The plan had $3,172,539,477 in  assets as of December 31, 2005.) “Defendants’ failure to do so constitutes a breach of the duty of prudence,” the court concluded. 

Wilson rejected the plaintiffs’ arguments that the plan fiduciaries opted for retail shares because they wanted to maximize their revenue-sharing revenue given the retail shares’ higher fees. The court said there was no evidence that the plan fiduciaries considered revenue-sharing when they selected the retail-class funds.


Finding of No ERISA Breach 

Wilson found no such breach in the plan’s decision to go for retail shares of three other funds - the Berger (Janus) Small Cap Value Fund, the Allianz CCM Capital Appreciation Fund, and the Franklin Small-Mid Cap Value Fund - based on the fiduciaries' actions within the legal statute of limitations, which Wilson said began on August 16, 2001.  

The court also threw out breach claims regarding the State Street Global Advisors Money Market Fund. Wilson ruled that the fund's management fees fell well within the range of competitive, reasonable money market fund fees. 

“Where the undisputed evidence establishes that the Money Market Fund significantly outperformed its market benchmarks net of fees for 9 years, and Plaintiffs can only present evidence that, at most, two money market funds charged lower fees than the Money Market Fund at some point from 1999 to 2007 while several others charged comparable or even higher fees during the same period, Plaintiffs cannot meet their burden of showing that investment in the Money Market Fund was imprudent,” Wilson wrote in the ruling. 

Calculating Damages 

Regarding damages, Wilson ordered plaintiffs’ lawyers to recalculate the “substantial damages” incurred by the fiduciaries’ actions.  

Wilson wrote: “The Court concludes that, despite the stated mandatory minimum investments for the institutional share classes, Defendants could have invested in the institutional share classes of the William Blair, PIMCO, and MFS Total Return funds at the time the funds were first added to the Plan. Thus, for each of the three funds, damages should run from the date the Plan initially invested in the funds, July 2002, to the present.” 

Plaintiffs filed the suit as aclass action on August 16, 2007, against Defendants Edison International, Southern California Edison Company, the Southern California Edison Company Benefits Committee, the Edison International Trust Investment Committee the Secretary of the SCE Benefits Committee, SCE’s Vice President of Human Resources, and the Manager of SCE’s Human Resources Service Center. 

Glenn Tibble, William Bauer, William Izral, Henry Runowiecki, Frederick Sohadolc, and Hugh Tinman, Jr. were selected as named plaintiffs.

Wilson certified the case as a class action on June 30, 2009, and then threw out most of the plaintiffs’ original claims in orders issued July 16 and July 31, 2009.  

The latest Wilson ruling is here.