How a Plaintiff's Attorney Views the Supreme Court Fee Case

The U.S. Supreme Court announced early this month that it would review parts of an important 401(k) fee litigation case, Tibble v. Edison, sparking intense debate across the retirement planning industry.

PLANADVISER sat down recently for a Q&A with the plaintiff’s attorney in the case, Jerome Schlichter, of Schlichter, Bogard and Denton, to discuss what’s at stake for plan sponsors, participants and service providers.

According to case files on SCOTUS blog, the Supreme Court is limiting its review of Tibble to the following question: “Whether a claim that ERISA [Employee Retirement Income Security Act] plan fiduciaries breached their duty of prudence by offering higher-cost retail-class mutual funds to plan participants, even though identical lower-cost institution-class mutual funds were available, is barred by 29 U. S. C. §1113(1) when fiduciaries initially chose the higher-cost mutual funds as plan investments more than six years before the claim was filed.”


PA: Our readership seems to be very interested in following this case and learning more about fee litigation and ERISA-related liability. The big matter in the Supreme Court’s review of Tibble is the statute of limitations period. Tell us about your expectations for how this last stage in a complicated case will play out.

Schlichter:  Well I certainly look at many of these questions differently than the people quoted in your article from October 6. The question before the Supreme Court is whether plan sponsors can get permanent immunity on an imprudent investment decision, for all time, based on the limitations period you mention. The lower courts have decided that, even if a plan has been shown to include a fund that is known to be imprudent, as is the case here, it can be protected from liability by the ERISA six-year limitations period. That’s the question the court has to decide whether to overturn—whether it’s appropriate to give sponsors permanent immunity from liability once the investment that is being challenged has been on the plan menu for six years.

Contrary to what the defense lawyers have said in quotes you and others have published, to the effect that the sky will fall for plan sponsors and employers if the limitations period is not allowed to stand in this case, we believe it is critical for the Supreme Court to block this permanent immunity. ERISA’s primary function is to establish an ongoing duty for plan sponsors to make sure plan participants receive proper monitoring and vetting of funds for prudence. That is the law today, and that has always been the law.

Just as a broker advising clients in the non-retirement plan context doesn’t and shouldn’t stop the monitoring process once the stocks in question have been in the account for a certain period of time, neither should a plan fiduciary get to stop the clock on the duty to monitor. But that’s what will happen if the court says that, for a known imprudent fund, and I emphasize the point that it’s a known imprudent fund we’re talking about, the duty to monitor ends after six years.

This is a multi-billion dollar 401(k) plan, and its participants should not be paying retail fees, and the lower courts already found that it is a fiduciary breach to have retail share classes in this plan. The 9th Circuit upheld that finding—it’s no longer even an issue. So now, look at it from the participant perspective. We have a number of proven-to-be-imprudent funds sitting on the menu, in which people are paying excessive fees. The question is, then, do you give a blank check for permanent immunity for this sponsor simply because some of those funds were added more than six years ago? If you do eviscerate ERISA in this way, you’ll make a mockery of any ongoing need to monitor funds for prudence.

PA: How do you respond to the contention, if the six-year limitations period is made to be less important, as some are saying, that employers may exit the 401(k) system?

Schlichter: I reject the argument that the sky is falling on the 401(k) industry, and that will still be the case if the court rules in favor of the plaintiffs in Tibble. This will instead represent an important decision affirming the fact that, as many plan sponsors already do, the fiduciaries to a retirement plan have a permanent and ongoing duty to look at their funds to make sure they are prudent, and they must remove funds that do not meet key standards. It’s not going to make the sky fall, as they suggest, it’s going to protect participants, which is what is required by ERISA in the first place.


PA: It’s been suggested to us that the process in place at Edison was obviously not perfect, but it was in some respects a reasonable monitoring process—they had regular meetings and discussed funds regularly, but for whatever reason the decision was never made to move away from certain retail share classes for some funds on the menu. So in this sense, while the funds were imprudent, you can’t say there was no monitoring at all going on. Sounds like you would disagree?

Schlichter: Well, I have a few responses to that. One, the court specifically found that was not the case on the retail funds Edison sponsors kept on the plan. That’s been tried and decided on the facts, and that is not part of what the Supreme Court will review.

What the court said was that, when you have a share class that’s identical in terms of managers, stock selections, asset allocation, and in every other respect except for fees, for a $3 billion plan to have its employees in the higher cost share class, that’s a breach of fiduciary duty. The monitoring was clearly not robust enough, in this sense.

The outstanding question has to do with several imprudent funds that were in the plan for more than six years when the case was filed. These funds have already been shown to suffer from the exact same defect that the court found to be a breach of fiduciary duty for the newer funds. For someone to say that there is evidence of appropriate monitoring, when the court has ruled against that point, they’re just not correct. 


PA: What about the importance of the limitations period in ERISA in terms of protecting sponsors who are, for the most part, working with the best interest of plan participants in mind? Should there be any protection for Edison International in this case based on the timing of the challenges? What do you think will happen to the limitations period if the Supreme Court appeal is successful?

Schlicther: The failure to monitor the investment menu properly and to review these funds within the six-year period is what we contend is the breach. What’s going to happen is that plan fiduciaries, if the decision to time-bar these claims is reversed by the Supreme Court, will know that they absolutely have to continue to monitor funds that are included in the plan, whether they’ve been on the menu for six years or not.

If the Supreme Court upholds the decision, on the other hand, what’s going to happen is that plan sponsors will effectively be given the ability to shut down the monitoring of a fund after it’s been offered for six years. That would be completely inconsistent and at odds with what fiduciaries are required to do for [defined contribution] plans today under ERISA, we believe.  

It’s is not an intention of ERISA to allow plans sponsors to say, ‘Okay, a certain amount of time has passed, so now we can quit monitoring this fund or that fund.’ We feel there is real risk of developing a blank check of immunity for plan sponsors should the Supreme Court move to uphold.

PA: This is where another important question comes in, whether there needs to be some sort of triggering event or some real material change in the fund that would basically restart the six-year limitations period? Some attorneys have suggested the ability to challenge the initial inclusion of these later-found-to-be imprudent funds on the plan menu is a different challenge, fundamentally, than failure to monitor. Obviously you disagree.

Schlichter: If a Bernie Madoff fund was in this plan for more than six years, would there be any justification for a sponsor to shut down the monitoring of that fund for all time just because the six year period has run out? Even though we now know Madoff was running a Ponzi scheme, the defense's argument would seem to suggest that the sponsor would have a right to leave the fund in place simply because it was put on the menu more than six years ago, despite the fact that it is a known Ponzi scheme. I would ask these attorneys if this is the result that is desired. I submit that’s not what ERISA is designed to do.

And the second point, perhaps even more important, what about the new participant in the plan? What about somebody who wasn’t in the plan more than six years ago? This is not some hypothetical fishing expedition; we’re talking about known imprudent funds in this plan, suffering from the same defect as the newer funds offered on the plan, which were already found to be a breach.

So the employee that joined this plan a year ago, they’re paying known excessive fees and that is now known and acknowledged by the courts. Do we want to say that Edison is protected from any challenge by this new participant because it decided to include the imprudent funds more than six years before this individual started working for the company? That’s what these attorneys’ position would lead to.


PA: Others have suggested a participant in this position would still be able to challenge the ongoing inclusion of this fund based on the sponsor’s failure to monitor the investment menu—as opposed to the failure to do proper due diligence when originally selecting the funds in question. Is there a difference between challenging the initial and specific decision to include the fund, which must be done within six years under ERISA, and challenging the adequacy of the ongoing monitoring process?

Schlichter: I don’t see how you can say they are asking for anything other than permanent immunity once the statute of limitations runs out. I would like to know, what are the other ways to challenge the funds? You can talk about the theory, but the defense lawyers in the case have not articulated any other way for a new plan participant to challenge the fund. There is only one way to challenge these funds, and that is under ERISA, and that is what we are doing.

If you look at the comments in your articles and the comments that have been made by attorneys representing employers in these cases, they commonly go back to the argument that the sky is going to fall on the 401(k) system if this litigation proceeds. There is an emphasis on how delicate the balance is between protecting participants and ensuring employers will continue to offer retirement benefits at all.

Well, we have been hearing this argument for more than a decade now and it has not come to pass. This case and others were originally filed more than eight years ago at this point, and they said the sky was falling then—that if these cases weren’t dismissed the 401(k) would start to disappear. That position has had no support from reality. You know as well as I do that the sky has not fallen on the 401(k) industry even as these cases, some of them, have been argued and settled.

Participants have been reimbursed for inappropriate losses over the years and it has not caused the destruction of the 401(k) system. You don’t have to take my word for that, the fact is that it’s easily documented that we have more assets in 401(k) plans today and record numbers of employers providing defined contribution retirement benefits. So the opposite is happening—the 401(k) system is more robust now than it ever has been in the past. That’s not to say that there aren’t some abuses, of course.

In addition, the current [media] coverage has included many surveys showing 401(k) fees have been coming down, and plans have been reformed and we are having success removing retail-fee share classes from the system, and it hasn’t caused the sky to fall. Again the opposite has happened; the sky has brightened compared to the time before any light was being shown on these practices.


PA: What can you tell us about the time frame for the high court's decision?

There are some deadlines coming up at the end of the year for filing informational briefs, and I expect the case will actually be argued in February.