Tibble v. Edison 401(k) fee-case decision offers 3 lessons

The recent ruling makes important points regarding share-class selection, the timing of fund changes and comparisons to the S&P 500 index

Aug 22, 2017 @ 2:17 pm

By Greg Iacurci

Tibble v. Edison, a landmark 401(k)-fee case, is finally nearing its close after 10 years of litigation, following a court order last week that laid to rest the lawsuit's remaining points of contention.

The case, the first of its kind to go to the Supreme Court, was only the second involving alleged excessive 401(k) fees to have received judgment following a trial. (The other was Ronald C. Tussey v. ABB Inc.) Others have been dismissed, settled or received summary judgment.

"This is one of the few that's really gone all the way," said Marcia Wagner, principal at The Wagner Law Group. "I think it's a very significant case. It established something many of us thought and said but wasn't really written anywhere: There's an ongoing duty to monitor [plan investments]."

The Supreme Court established this duty in a 2015 decision, and sent the case back to the lower courts for consideration.

The ruling issued Aug. 16 by Judge Stephen V. Wilson of the U.S. District Court for the Central District of California contains a few takeaways for 401(k) advisers and plan sponsors, all the more important in an environment of burgeoning fee litigation.


Share class is a central theme in much of the outstanding fee lawsuits, most often focusing on choosing retail versus institutional share classes for a retirement plan.

Judge Wilson determined that "a prudent fiduciary would have invested in the lower-cost institutional-class shares" of all 17 mutual funds at issue in the retirement plan of Southern California Edison Co.

The decision underscores the need for "careful consideration and, frankly, being proactive in knowledge about what share classes are available," said Emily Costin, a partner at Alston & Bird.

Often, institutional share classes may not be available to a plan due to a minimum asset threshold, but fiduciaries will want to monitor what is available when a plan ultimately reaches that threshold, Ms. Costin said.

The judge's opinion shouldn't indicate institutional shares will always be the right option for a plan, she said; that will depend on individual facts and circumstances.


The judge also addresses the notion of how quickly a fund, such as a retail-share-class fund, should be replaced for one deemed more prudent.

Judge Wilson expressed there may be times when a fiduciary suspects an imprudent investment but waits until a "regularly scheduled systematic review to confirm [the] suspicion and properly reinvest the funds elsewhere." But Tibble v. Edison, in his determination, was not one of those instances.

Rather, a prudent plan fiduciary would be mandated "to switch share classes immediately," given the fiduciaries "indisputably [had] knowledge of institutional share classes and that such share classes provide identical investments at lower costs."

Ms. Costin called this the most important takeaway from the decision, and necessitates plan fiduciaries to "consider swift action" regarding a share-class change.

In the Tibble case, Judge Wilson rejected defendants' position that two to five months were necessary for the plan to make a switch.

Ms. Wagner said "immediate" is analogous to "as soon as reasonably practicable," which, as an estimate, could mean two to four weeks.

"There's no hard-and-bright line, but I can tell you a year is probably too much," she said. "It has to be moderated by the real world. We don't live in an instantaneous world."


Judge Wilson found that an S&P 500 index fund wouldn't be a reasonable barometer against which to approximate monetary damages from the allegedly imprudent investments.

This is similar in nature to other judges who've found in recent cases, such as ones involving Wells Fargo & Co. and Putnam Investments, that Vanguard index funds aren't reasonable as a performance or fee benchmark for actively managed funds.

Rather, the judge found that the 401(k) plan's "overall returns" represented a "reasonable approximation of lost investment opportunity" from 2011 to today.


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