Supreme Court hears a case that may have broad implications for 401(k) savers
Supreme Court hears a
case that may have broad implications for 401(k) savers
On Feb. 24, the nation’s highest court began to hear
arguments in an initial class-action lawsuit, Tibble, et al v. Edison
International, regarding higher-than-necessary investment fees paid by 401(k)
plan participants. This lawsuit is the first of many class-action 401(k)-related
lawsuits of its kind to be heard by the U.S. Supreme Court.
According to the national Employee Retirement Income
Security Act (ERISA), companies sponsoring 401(k) plans must act in a fiduciary
capacity – that is, in the best interest of their employees participating in
the retirement savings plan. According to the common law of trusts, which helps
inform ERISA, a fiduciary is “is duty-bound ‘to make such investments and only
such investments as a prudent [person] would make of his own property having in
view the preservation of the [plan] and the amount and regularity of the income
to be derived.’”
Edison employees claimed that the company breached this
fiduciary duty by failing to monitor excessive fees, favoring six retail-class
mutual fund options with high administrative fees when comparable institutional-class
offerings were available for lower fees.
As reported in numerous studies, 401(k) investment fees that
are levied within a retirement plan can eat away a substantial amount of one’s
savings, resulting in the difference of up to tens of thousands of dollars in
one’s nest egg.
have been off in a dark closet for 40 years without scrutiny of any significant
amount,” said the petitioners’ lawyer, Jerome Schlichter,
who has filed 13 similar lawsuits over the past eight years. “Whenever you have
a situation like that, some people are going to act in their self-interest.”
The petitioners, including past and present employees of
Edison International, allege that their retirement plans had been managed
“imprudently” and in a “self-interested fashion” by their plan sponsor, and
they have the backing of organizations such as the AARP, the Pension Rights
Center and U.S. Solicitor General in their claim.
There has been one technical flaw in the petitioners’ claims
that has set them back in lower courts, however. According to ERISA’s statute
of limitations, plan participants can only sue for funds that have been in the
plan for six or fewer years, and three of the six investment options in
question have been in the plan since 1999 – eight years before the lawsuit was
initially filed in 2007.
Petitioners argued that regardless of the amount of time the
funds have been in the plan, it remains the plan sponsors’ responsibility to
monitor the investment options and leverage their purchasing power to get the
best 401(k) deal for their employees.
The district court issued summary judgment with Edison,
agreeing that the Act’s limitations period and safe harbor provisions are, in
fact, hindrances to the petitioners’ claim. According to the U.S. District
Court for the Central District of California, ERISA’s limitations period barred
recovery for claims arising out of investments that were included in the plan
more than six years before beneficiaries had initiated the lawsuit.
The lower court did agree, however, that Edison had been
imprudent because they failed to investigate institutional-class alternatives
to the eligible high-fee mutual funds that were purchased within the past six
years, and, for that, the court awarded damages of $370,000. United States
District Court of Appeals for the Ninth Circuit affirmed the district court’s
“We have little difficulty agreeing with the district court
that Edison did not exercise the ‘care, skill, prudence, and diligence under
the circumstances’ that ERISA demands in the selection of these retail mutual
funds,” said Judge O’Scannlain in the appeals court’s opinion.
However, O’Scannlain also stated that “under ERISA’s
six-year statute of limitations, the district court correctly measured the
timeliness of claims alleging imprudence in plan design from when the decision
to include those investments in the plan was initially made. The panel held
that the beneficiaries did not have actual knowledge of conduct concerning
retail-class mutual funds, and so the three-year statute of limitations set
forth in ERISA Ã‚Â§ 413(2) did not apply.”
The Supreme Court appeal hinges on a technical statute of
limitations issue – whether or not the three funds purchased in 1999 are
applicable recoverable claims – however, the high court’s decision will likely
have broad implications that further define the scope of duty of prudence among
401(k) fiduciaries, as well as lead to more similar lawsuits surfacing in the future.