26 April 2017

DC Execs Wary About Tibble Ruling

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Attorneys who represent defined contribution plan sponsors and DC plan consultants say the U.S. Supreme Court's recent decision in Tibble et al. vs. Edison International has created uncertainty for plan executives. While the court's unanimous ruling reaffirmed and clarified what plan executives should have been doing all along — continuously monitoring investments — it didn't establish guidelines for that monitoring.  

Other attorneys said the decision highlights that fiduciaries' inconsistent monitoring and inadequate record keeping are a prescription for trouble. James P. McElligott Jr., a Richmond, Va.-based partner for McGuire Woods LLP, said the need for action is heightened by the ruling that fiduciaries' responsibilities aren't restricted by an ERISA six-year statute of limitations for suits alleging breach of fiduciary duty.

The Supreme Court has told fiduciaries “to take seriously their responsibility in time and in effort,” said Nancy Ross, a Chicago-based partner for Mayer Brown LLP.  Although the Tibble case focused on fees for plan options, prudent fiduciaries will look at the instructions by the court as meaning more than a duty to monitor investments.

Higher damages 

Mr. Blumenfeld said he wasn't sure whether the court's ruling would lead to more lawsuits, but noted it could lead to higher damages assessed through verdicts or settlements and higher plan costs due to litigation expenses. The Tibble case started in August 2007 with a class-action lawsuit filed by 401(k) participants against Edison International Inc., Rosemead, Calif., a utility holding company, and others associated with the Edison plan. The suit was filed in the U.S District Court for the Central District of California.

The participants alleged plan executives violated their fiduciary duty when they chose retail shares for mutual funds over lower-priced shares for the same investments. They challenged six mutual funds — three that were added to the plan lineup in 1999 and three that were offered beginning in 2002.

The District Court in 2009 dismissed the claim for the 1999 funds, citing the six-year statute of limitations for filing a fiduciary breach claim that is part of the Employee Retirement Income Security Act. However, after a trial, the court in 2010 ruled in favor of the participants regarding the 2002 mutual funds, awarding them $370,732 in damages. The participants appealed the ruling on the 1999 funds, and the 9th U.S. Circuit Court of Appeals upheld the decision in 2013. Participants then petitioned the Supreme Court.

Non-binding in other circuits 

If the appeals court offers guidelines, its decision will affect only ERISA-covered DC plans in the 9th Circuit's area — California, Nevada, Alaska, Hawaii, Idaho, Washington, Oregon, Montana and Arizona. If the appeals court sends the case back to the District Court where the Edison ruling originated, ERISA attorneys said litigation might go on for several more years unless there is a settlement.

Attorneys and consultants said fiduciaries shouldn't wait for follow-up litigation, maintaining that an ounce of fiduciary prevention can protect against a pound of litigation. Monitoring covers regular appraisals of fees, fund performance, risk, style drift and “organizational stability” — whether fund managers leave — on a quarterly basis, she said.

Ms. Lucas conceded that lower-court interpretations of the Supreme Court ruling remain a wild card for plan management. Consultants say the best defense in ERISA legal challenges is documenting the process for their decisions.

Click here to access the full article on Pensions & Investments.

 

   
   

 

 

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