Benefits and Compensation

Fiduciaries Cited for Overreliance on Investment Consultant Advice

Fiduciaries of 401(k) plans were reminded by a recent court decision that it’s best not to accept financial consultants’ investment advice for a retirement plan’s assets without careful scrutiny. At the same time the case, which raised other issues important to managing defined contribution plans, resulted in several rulings in the plan sponsor’s favor.

Facts of the Case

In Tibble v. Edison International, No. 10-cv-56406 (9th Cir., March 21, 2013) a three-judge appellate panel ruled for the class-action plaintiffs — former employees and plan participants of Southern California electric utility Edison International — on their claim that Edison breached its fiduciary duties in a procedural way by not investigating lower-cost share options for the company’s 401(k) plan options. On the recommendation of its investment adviser, Edison selected retail-class shares for mutual funds offered in the 401(k) plan. At the time of litigation (the complaint was filed in 2007), the Edison plan was valued at nearly $4 billion and had about 20,000 participants.

In earlier proceedings, the U.S. District Court for the Central District of California had granted summary judgment to Edison on all claims except the prudence of including retail-priced shares in participants’ 401(k) investment options (639 F. Supp. 2d 1074, 2009). That claim made it to trial and in 2010 the district court ruled that Edison plan fiduciaries had breached ERISA prudence standards by failing to seek out less expensive institutional-class alternatives. The court awarded the plaintiffs $370,000 in damages for this breach.

Upon appeal, in a cautionary point for plan sponsors and their advisers who may find themselves challenged on similar investment selections, the 9th Circuit judges ruled that Edison did not present sufficient evidence on how its investment consultant engaged in prudent consideration of share classes for the plan’s funds.

What This Means for Plan Sponsors

In light of the Tibble decision, plan fiduciaries should be sure to ask plan financial advisers and consultants why their investment recommendations are prudent and whether those recommendations are the best choices for the fees charged. The ruling also points out the importance of presenting detailed evidence in such lawsuits to show what exactly was considered by the plan fiduciaries and their consultants when selecting plan investment products.

“This case really shows how important it is to do your homework,” said Angel Garrett, an associate with Trucker & Huss law firm in San Francisco who analyzed the Tibble case for her firm’s March Benefits Report. “I can’t emphasize enough the need for monitoring investment consultants for every single option. Ask if there are alternatives.”

Based on the ruling, Garrett recommends that plans not automatically exclude retail-class mutual funds, as long as their fiduciaries ask about the availability of alternative class shares. She also noted the 9th Circuit judges’ focus on lack of decision documentation for just three funds out of about 40 options Edison offered its participants. She said she would counsel plan sponsor clients that “the court told Edison it demonstrated prudence on most of its [investment option] choices, but the one time you don’t, the court will catch it.”

Finding out More

To read the complete story on Thompson’s HR Compliance Expert, click here.

To read more about fiduciary duties in 401(k) plan management, see ¶410 in The 401(k) Handbook.