Kickbacks, betrayal, multimillion dollar amounts and even the Supreme Court—Tibble v. Edison International would appear to have it all.
The high-profile class action lawsuit, seen by many industry watchers as the opening shot in a larger war waged by tort lawyers against 401(k) plan sponsors and administrators, was heard by the high court on Feb. 24.
At issue is whether or not Edison, a utility based in Rosemead, California, failed in its fiduciary duty to employees that participated in its 401(k) plan by offering higher cost retail mutual funds, rather than the lower cost institutional share classes for which the plan qualified.
Surprisingly, Edison isn’t arguing the merits of the suit; rather, it claims that under ERISA statutes, plaintiffs could only sue over funds that were among the investment offerings during the previous six years or less. Some of the funds in question were offered longer than six years ago, which Edison argues fall outside the window for legal standing.
Plaintiffs countered that regardless of the timing of the plan’s investment offerings, fiduciary responsibility for plan choices is ongoing.
Oral arguments in the case come at a time of heightened scrutiny of 401(k)s and related issues. President Obama recently threw his support behind the Department of Labor’s push for stricter fiduciary standards. In addition to Tibble v. Edison, similar lawsuits have been brought against Nationwide Financial Services, MassMutual, and Lockheed Martin, which were all settled. Tobacco giant R.J. Reynolds is currently embroiled in a similar suit.
“Registered investment advisors have a fiduciary duty to their clients,” writes Dan Solin, director of investor advocacy and a wealth advisor with Buckingham Asset Management, in U.S. News and World Report. “In my opinion, it would be a breach of that duty to place a client who qualifies for institutional shares in retail shares of the same fund.”
Plan sponsors of 401(k) plans also have a fiduciary duty to participants in the plan, he added.
“These duties are imposed by the Employee Retirement Income Security Act of 1974. If a plan sponsor breaches its fiduciary duty, participants have six years to seek redress in court. The penalties for breaching a fiduciary duty to the plan can be substantial, including an obligation to make good on any losses resulting from the breach.”
The ESOP Association, a national trade association for companies with employee stock ownership plans, employed a football metaphor in an amicus curiae filed in defense of Edison International.
“Congress, in both ERISA and legislative history, in accordance with seven hundred years of common law principals, makes it clear that if a fiduciary’s decisions seemed prudent under the circumstances when made over six years earlier, is not to be second guessed,” explained J. Michael Keeling, the association’s president. “To bring this into easily understood terms, in the Super Bowl several years ago, the referees maybe should have called pass interference on a reception in the end zone that resulted in Team A winning, and the NFL has decided to take the touchdown away, and declares Team B the winner,” he concluded.
Edison’s plan currently manages approximately $3.8 billion in assets and has 20,000 participants.
See Also:
- Tibble Decision Cited in Latest Fidelity 401(k) Lawsuit
- The Latest Targets of 401k Fee Lawsuits Are …
- Edison International 401(k) Saga One Step Closer to End
- Exclusive: John Bogle’s Take on Tibble and Fiduciary
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
