As a landmark 401(k) excessive fees lawsuit makes its way to the U.S. Supreme Court, industry experts say the court's decision could set off a domino effect of changes — from the process of choosing plan funds to fiduciaries' ability to obtain liability insurance.
The case in question is the famed Glenn Tibble v. Edison International, a suit originally filed in August 2007 in the U.S. District Court for the Central District of California. The original suit centers on six retail mutual funds in Edison's plan menu, which were offered instead of cheaper institutional share classes.
Though the plaintiffs eventually received a 2010 judgment from the district court, they were granted only $370,732 in damages related to excessive fees in three of the mutual funds. The saga continued as both parties battled over fees, bringing the suit to the 9th Circuit Court of Appeals. Last week, the Supreme Court agreed to review the case.
Currently, the defendants are arguing a statute of limitations requires that plaintiffs bring a suit alleging fiduciary breach within six years of the last action constituting the breach.
In August, U.S. Solicitor General Donald B. Verilli paved the way for the case to come under review by the Supreme Court when he filed a brief in the suit declaring that the extent of fiduciary duty under ERISA isn't merely limited to six years. Mr. Verilli wrote, “Plan fiduciaries have a 'continuing fiduciary duty' to review plan investments and eliminate imprudent ones.”
Though some ERISA attorneys interpreted the focus on the six-year statute of limitations as a litigation tactic, other retirement industry experts noted that where the court lands on that issue could shape how fiduciaries serve retirement plans and participants.
“The theory of open-ended liability that could be continuing: On the one hand, you might be more protective of participants, but on the other hand, it can limit the degree to which [liability] insurance is written,” said Jason C. Roberts, CEO of the Pension Resource Institute, a retirement plan consulting firm for broker-dealers.
To put the idea of doing away with the six-year statute of limitations into context for financial advisers, consider keeping an arrangement of service providers and a line-up of 401(k) funds as a recommendation to “hold.” “Even though you didn't buy or sell the funds in this lineup, for those that were purchased before you had this ongoing duty, you had a duty to determine whether it was prudent to continue to hold,” Mr. Roberts said.
As a result, broker-dealers who have the infrastructure to supervise their select group of 401(k) fiduciary advisers will implement an even more rigorous process to manage their retirement plan business and who is cleared to work with it. Meanwhile, small RIA shops will become more selective about who they choose to do business with, as they consider the liability they could inherit when they take on new business, Mr. Roberts said.
There's also the question of what doing away with the six-year statute of limitations could mean for the availability of liability insurance for fiduciaries.
“There's always the possibility that the insurance company is hedging its bet that after a period of time they don't have to pay claims,” said Gary Sutherland, CEO of the North American Professional Liability Insurance Agency, a provider of liability coverage.
Depending on how the Supreme Court pursues the issue of the statute of limitations, plan committee members might seek some kind of protection in order to participate on the committee.
“I would want some kind of fiduciary insurance that will indemnify me if I'm brought in for a fiduciary lawsuit, and a corporate indemnification if I'm on the committee and also an employee of the company,” said Mr. Sutherland.
For its part, Edison maintains that it acted with the best interests of its employees in mind.
“The companies' [Edison International and Southern California Edison] and plan fiduciaries' efforts to act in the best interests of plan participants are reflected in the numerous rulings in our favor by the trial court and the 9th U.S. Circuit Court of Appeals in the class action challenge to our 401(k) plan,” wrote Edison spokeswoman Lauren Bartlett in an e-mail.
“Our contention is that the statute of limitations destroys the ongoing duty of sponsors and advisers to monitor for fees and performance,” said Jerry Schlichter, the attorney who is representing the Tibble plaintiffs.
“If the court adopts that position, it means that plan sponsors and advisers have to carefully continue to monitor, evaluate the funds that are in the plan — which is what they should be doing anyway,” he added. “If [that position] is adopted, it means that there is no immunity granted to plan sponsors and advisers just because the fund has been there for more than six years.”
Aside from the statute-of-limitations issue, the retirement industry will likely be shaken to its core given the fact that the highest court in the land is going to address the issue of excessive fees in 401(k)s. Greater attention to fees by the powers that be could tip the scales even more in favor of cheaper retirement plan offerings.
“It depends on what the Supreme Court is going to do: Will they answer the questions of whether there's a bright line with institutional versus retail funds,” said Marcia Wagner, a managing director of The Wagner Law Group. “If the Supreme Court says something that clearly, I think the entire industry will move in that direction.”
“I think you'll see the larger plans, and even the small to midsized plans, going institutional,” Ms. Wagner said. “The salient issue for the Tibble case is that the same funds were available in both institutional and retail. What's the difference that justifies the fees?”