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 SELECTION

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.

IMPORTANCE OF TIMING

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."

S&P 500 COMPARISON

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.

0
Comments

What do you think?

View comments

Upcoming event

Oct 22

Conference

San Francisco Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Most watched

INTV

How the 2020 elections could impact ESG investing

Joseph Keefe, president of Impax Asset Management, on the elections and how advisers can build a bridge to the next generation of clients with ESG investing.

INTV

How advisers can be a gamechanger for women investors

Why women defer to men when it comes to finances and how advisers can combat this phenomenon and make a difference for female investors, according to Heather Ettinger, founder and CEO Luma Wealth Advisors.

Latest news & opinion

Schorsch, AR Capital to pay $60 million to settle SEC charges

The former REIT czar and his firm wrongfully obtained millions linked to REIT mergers.

CFP Board postpones enforcement of its revised fiduciary standard

Board's new Code of Ethics and Standards to be enforced next June, in line with the SEC's Reg BI

Charles Schwab reportedly in talks to buy USAA brokerage, wealth management business

The deal would net Schwab roughly $100 billion in new assets.

Advisers scramble to help retirees navigate looming Fed rate cut

The Fed's first interest-rate cut in a decade has advisers warning against chasing the bait of risk over safety.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print