Tibble v. Edison International Ninth Circuit Issues Expansive Ruling Interpreting the Scope of Duties of 401(k) Plan Fiduciaries

ERISA Update

In a wide-ranging opinion, the U.S. Court of Appeals for the Ninth Circuit recently addressed claims that 401(k) plan fiduciaries breached their duties under ERISA. The opinion addresses a variety of investment practices that are commonly used in the 401(k) plans of large companies, as well as defenses that are commonly asserted in class actions arising from such practices. The decision is also notable because it reflects one of only a few ERISA class action lawsuits that have been decided after trial on a fuller evidentiary record.

Specifically, the Ninth Circuit affirmed a judgment that, with one exception, found that the plan fiduciaries had properly discharged their fiduciary duties under ERISA. The opinion addresses the propriety of common investment options and practices (retail mutual funds, a unitized stock fund, short-term investment funds, and revenue sharing) as well as ERISA’s statute of limitations and investment safe harbor. See Tibble v. Edison Int’l, No. 10-56406 (9th Cir. 2013).

Factual Background and Procedural History

Plaintiffs sued their 401(k) plan sponsor, Edison International, along with the individuals and committees who administered the plan. Seeking relief on behalf of themselves and a class, plaintiffs sought to recover investment losses arising from alleged breaches of fiduciary duty.

Plaintiffs pursued two general theories. First, they claimed that defendants had violated ERISA §§ 404(a)(1)(D) and 406(b)(3) (29 U.S.C. § 1104(a)(1)(D) and 1106(b)(3)) by using revenue sharing to offset plan administration costs. Second, plaintiffs claimed that defendants violated ERISA § 404(a)(1)(B) (29 U.S.C. § 1104(a)(1)(B)) by including a unitized stock fund, a short-term investment fund, and three retail mutual funds.

Revenue Sharing Did Not Violate ERISA

The Ninth Circuit rejected plaintiffs’ challenges to the use of revenue sharing to pay for plan costs. Plaintiffs argued that revenue sharing was prohibited by the language of the plan, which said the company would pay for plan costs, but the court deferred to the interpretation of the plan fiduciaries because the plan gave them discretion to interpret plan terms.1 The court also held that the use of revenue sharing did not constitute a “prohibited transaction” that allowed defendants to receive “consideration” in the form of discounted fees from a “party dealing with the plan.” Relying on regulations cited by the Department of Labor in its amicus brief, the Ninth Circuit departed from the reasoning of the district court, holding that, because revenue sharing is permitted by the plan, those payments are properly deemed “reimbursement” for plan expenses and not “consideration” or a violation of § 406(b)(3).2 The court noted, however, that a revenue sharing arrangement could, in other circumstances, give rise to liability if it drove fiduciaries to select certain funds over others or had the effect of increasing a mutual fund’s 12b-1 fees and overall expense ratios.3

Challenges to Investment Options

The court declined to hold that any of the challenged investments were objectively or categorically imprudent. However, after considering evidence of defendants’ processes in selecting the various investment options, the court held that the decisions to include the unitized stock fund and the short-term investment fund were not imprudent, while the decision to invest in retail share classes of certain mutual funds was imprudent.

With respect to the unitized stock fund, the court held that “investment drag” is a “well-recognized characteristic of unitized funds,” but refused to use hindsight to evaluate the impact of investment drag on stock returns, noting that cash investments within unitized funds provide increased liquidity and a hedge against stock price declines.4 Upon finding that defendants had acted with “vigilance” to minimize investment drag by evaluating the cash-to-stock ratio in the fund, the court affirmed summary judgment for defendants.5

With respect to the use of a short-term investment fund, rather than a stable value fund, the court held that the “primary question” was whether the defendants had employed “appropriate methods to investigate the merits of the investment” when the decision was made.6 Because the defendants had evaluated the pros and cons of both alternatives, the court affirmed judgment in their favor.

However, the panel affirmed judgment for plaintiffs on their claim that defendants imprudently selected more expensive share classes of certain retail mutual funds over available institutional share classes of the same funds. The court found insufficient evidence that the defendants or their investment consultant had utilized a prudent selection process. Citing evidence that the institutional funds offered lower fees “with no salient differences in investment quality or management,” the court held that defendants had failed to show reasonable reliance on the consultant’s advice.7 The court observed that “this might have been a different case” had defendants shown that the advisor “engaged in a prudent process” by presenting evidence of the advisor’s specific recommendations to the defendant committee about the funds, the scope of the advisor’s review, whether the advisor considered both retail and institutional share classes, or what questions or steps defendants used to evaluate those recommendations.8 The court declined to hold that retail mutual funds are categorically imprudent, recognizing that such funds offer benefits over their institutional counterparts, that fiduciaries are not required to offer only “wholesale” funds, and that the expense ratios of the retail funds Edison offered were not so “out of the ordinary” as to be inherently imprudent.9

ERISA’s Statute of Limitations for Imprudent Investment Claims

The Ninth Circuit affirmed the district court’s holding that claims arising more than six years prior to filing were barred by ERISA § 413(1) (29 U.S.C. § 1113(1)), which provides that claims must be brought within six years of (A) the last actions constituting a part of the breach, or (B) in the case of omissions, the latest date on which the fiduciary could have cured the breach. The court rejected plaintiffs’ attempt to extend the limitations period by treating the alleged breaches as continuing violations, holding that the “act of the designating the investment for inclusion” triggers the limitations period absent evidence that “changed circumstances” gave rise to a new duty to conduct a “full diligence review” of existing funds.10 The panel also declined to adopt defendants’ argument that it should apply the shorter limitations period under § 413(2) (29 U.S.C. § 1113(2)), which provides that claims must be brought within three years of the earliest date the plaintiff “had actual knowledge of the breach or violation.” Mere awareness that a challenged investment is a plan investment option, the court held, does not confer “actual knowledge of the breach or violation” absent “knowledge of how the fiduciary selected the investment.”11

ERISA Safe Harbor Does Not Apply to Claims for Imprudent Selection of Plan Investment Options

The Ninth Circuit rejected defendants’ attempt to invoke ERISA § 404(c), (29 U.S.C. § 1104(c)) as a defense to liability. When certain conditions are met, this “safe harbor” provision insulates plan fiduciaries from liability for losses resulting from participants’ exercise of control over their accounts. The panel held that a preamble to the Department of Labor’s regulations in effect at the time of the alleged breach (and subsequently codified in the regulations themselves) excluded from the safe harbor a fiduciary’s decision as to which investment options to include in the plan.12 Reinforcing an existing circuit split on the issue, the panel followed the decisions of the Fourth, Sixth and Seventh Circuits, while rejecting those of the Third and Fifth Circuits, and held that, like the final rule, the preamble was entitled to deference under Chevron v. Natural Resource Defense Council, Inc., 467 U.S. 837, 842-43 (1984).13

1Tibble v. Edison Int’l, No. 10-56406, at 28-30, 32-33 (9th Cir. 2013)

2Id. at 36-38, citing 29 C.F.R. 2550.408(b)-2(e)(3); DOL Adv. Op. 97-19A, 1997 WL 540069 (Aug. 28, 1997).

3Id. at 43.

4Id. at 45-46.

5Id. at 46.

6Id. at 44-45, citing Cal. Ironworkers Field Pens. Trust v. Loomis Sayles & Co., 259 F.3d 1036, 1043 (9th Cir. 2001).

7Id. at 48-49, citing Howard v. Shay, 100 F.3d 1484, 1489 (9th Cir. 1996).

8Id. at 49-50.

9Id. at 40-43, citing Loomis v. Exelon Corp., 7658 F.3d 667, 671-72 (7th Cir. 2011); Hecker v. Deere, 556 F.3d 575, 586 (7th Cir. 2009).

10Id. at 10-12.

11Id. at 12-13, quoting Brown v. Am. Life Holdings, Inc., 190 F.3d 856, 859 (8th Cir. 1999).

12Id. at 14-23.

13Id. at 15-16, 18-23.

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