In prior posts (June 15, 2010 and December 17, 2009), I pointed out that even though
plaintiffs were losing their lawsuits challenging 401(k) plan fees,
the legal issues were still far from settled. The Court of Appeals
for the Eighth Circuit reinstated claims against the huge WAL-MART
401(k) Plan, challenging the use of retail instead of comparable
institutional class mutual funds for the plan, and new law and
regulations could be forthcoming.
We have just had a decision from a federal district court in
Tibble v. Edison International, in which the court ruled on
the issue of retail versus institutional funds and found that the
Investment Committee of a 401(k) plan and other defendants violated
ERISA's duty of prudence by selecting retail mutual funds
rather than identically invested institutional funds as available
plan investments. The court did rule against plaintiffs earlier and
in this decision on some of the issues that have repeatedly been
raised in these suits; for example, the court ruled that revenue
sharing in and of itself was not a prohibited transaction. However,
this decision sends a strong message to 401(k) plan fiduciaries
that they must become more actively involved in fund selection and
Large fund families typically offer two identically managed
classes of shares in the same fund: an institutional class for
large investors, which typically has a lower expense ratio, and a
comparable retail class with higher fees for smaller investors. The
retail class shares selected for the plan provided for revenue
sharing; the institutional class shares did not. The Investment
Committee received advice from Hewitt, an outside adviser, in
selecting investments, but the court ruled that consulting experts
was not a complete defense to ERISA imprudence charges, stating
that the fiduciary "must make certain that reliance on the
expert's advice is reasonably justified."
In ruling against defendants on the prudence claims, the court
rejected their defense that their accounts were not large enough to
satisfy the minimum investment requirements for institutional
funds. Evidence was introduced that these minimums were typically
waived for larger 401(k) plans such as the Edison plan upon
request, and that the fiduciaries had made no effort to ask about
or request waivers. Failure to ask thus became the crucial factor
in the court's decision.
The duty of loyalty was also an issue because plaintiffs said
the fiduciaries picked funds with revenue sharing to reduce the
fees Edison paid rather than making the selection solely in the
interest of the participants to whom the duty of loyalty runs. Even
though Edison paid the plan fees that were offset by revenue
sharing, and higher expense ratios reduced participant investment
return, the court ruled that ERISA's duty of loyalty was not
violated when Edison fiduciaries selected the retail funds and that
funds were not selected in order to increase revenue sharing.
Had participants paid all expenses, the court might have instead
asked whether the fiduciaries had compared the dollar benefits of
revenue sharing against the additional fees.
Damages have not been determined yet, but they will include
participants' lost investment opportunity as well as return of
In addition, the Department of Labor has just issued interim final regulations, to be
effective in 2011, requiring new fee disclosures by service
providers to hiring plan fiduciaries, and has announced that new
participant fee disclosure regulations are forthcoming.
Investment fiduciaries of 401(k) plans can best protect
themselves by understanding as much as possible about the fee
structures of plan investments, by taking cues from the Tibble
case, and by monitoring proposed and future law changes to identify
best practices they should be following now.
Caro Buckmannl has practised in the employee
benefits field for over 25 years, advising clients on all aspects
of employee benefits and retirement plans, including questions
relating to 401(k), defined benefit and employee stock ownership
plans, welfare plans, fiduciary responsibility, prohibited
transactions and plan asset issues arising in investment fund
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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