401(k) fiduciary breach lawsuit heads to the Supreme Court

Court asked to consider statute of limitations that require plaintiffs to bring a suit alleging breach of duty within six years

Aug 27, 2014 @ 12:25 pm

By Darla Mercado

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A classic 401(k) lawsuit centered on whether an employer violated its fiduciary duty when choosing retail funds over cheaper institutional share classes has been green-lighted for review by the Supreme Court.

Last Friday, Solicitor General Donald B. Verrilli Jr. filed a brief in Glenn Tibble v. Edison International, a lawsuit that was filed seven years ago and was among the first lawsuits brought by employees against their employer due to unreasonable 401(k) fees.

At the heart of the issue, according to the suit, is that Edison offered a slate of about 40 mutual funds, six of which were retail share class funds, even though cheaper institutional share class versions were available. The funds also used revenue sharing, which allowed Edison to pay less to its record keeper for plan services.

Though the case eventually led to a 2010 judgment in the U.S. District Court for the Central District of California, the plaintiffs in the Edison 401(k) plan were only granted $370,732 in damages related to excessive fees in three of the retail funds. The story doesn't end there, however: Since then, both parties have been fighting over fees, eventually taking the battle to the 9th U.S. Circuit Court of Appeals and the Supreme Court.

In this latest development, Mr. Verrilli is responding to a request by the Supreme Court to review the fiduciary breach claim against Edison for adding the costlier retail share class mutual funds when lower-cost choices were available.

The defendants have argued that the court has no standing because a statute of limitations requires plaintiffs to bring a suit alleging breach of fiduciary duty within six years of the last action constituting the breach.

Though the investment menu's fund options have been available since 1999, and the original suit was filed in 2007, Mr. Verrilli notes that “plan fiduciaries have a 'continuing fiduciary duty' to 'review plan investments and eliminate imprudent ones.'”

“Plan participants may bring suit for any breaches of fiduciary duty within that six-year period — regardless of whether they challenged the first breach of that type,” Mr. Verrilli wrote. “Fiduciaries have a continuing duty to manage plan investments prudently, and a prior failure to do so does not excuse similar failures within the limitations period.”

He added, “It does not matter if a different fiduciary initially chose the investments, because the new fiduciary has a duty to cure breaches by a co-fiduciary.”

As such, that issue warrants the review of the Supreme Court, according to Mr. Verrilli. The next step is for the Supreme Court to have a conference and decide whether to take the case, which Jerry Schlichter, the attorney representing the Tibble plaintiffs, expects to occur in the next 60 days.

Mr. Verrilli's finding has far-reaching implications. Had he decided not to send the issue for review, the effects could have been harmful for retirement plans. “It would give permanent immunity to fiduciaries from monitoring the investments once they have been in the plan for six years,” said Mr. Schlichter. “New fiduciaries who never reviewed the fund options would also be permanently immunized from liability, even if there is an imprudent investment that everyone agrees is imprudent,” he added.

“That's not the law, we contend,” Mr. Schlichter said.

A call to Edison for comment was not immediately returned.

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