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U.S. District Judge Stephen V. Wilson of the U.S. District Court for the Central District of California declared that Southern California Edison (SCE) and its plan fiduciaries violated the duty of prudence imposed by the Employee Retirement Income Security Act (ERISA) by not properly investigating the differences between selecting retail shares instead of institutional shares. Wilson’s 82-page ruling in Tibble v. Edison International was significant because the court accepted an often-advanced claim in 401(k) excessive fee suits that fiduciaries violate their ERISA-imposed duties by not adding less-costly institutional shares to their plans. “Had the Investments Staff and the Investment Committees considered the institutional share classes when adding these funds in 2002 and weighed the relative merits of the institutional share classes against the retail share classes, they would have realized that the institutional share classes offered the exact same investment at a lower cost to the Plan participants,” Wilson contended. “Thus, Defendants would have known that investment in the retail share classes would cost the Plan participants wholly unnecessary fees.” In regards to the three funds that were the focus of the fiduciary breach finding, Wilson turned aside defendants’ arguments that the fact they were taking the advice of Hewitt Financial Services (HFS) when they opted for the retail shares negated any fiduciary breach. (The three funds were the William Blair Small Cap Growth Fund, the MFS Total Return Fund, and the PIMCO (Allianz) RCM Global Tech Fund.) Wilson commented: “While securing independent advice from HFS is some evidence of a thorough investigation, it is not a complete defense to a charge of imprudence.” The court likewise rebuffed defense claims that they couldn’t look further into institutional shares because of mandatory investment minimums placed on those shares. Wilson argued that the fiduciaries should have asked for a waiver of the minimums and noted that the fund managers involved had never turned down a similar request from a similarly sized plan (The plan had $3,172,539,477 in assets as of December 31, 2005.) "Defendants' failure to do so constitutes a breach of the duty of prudence,” the court concluded. Wilson rejected the plaintiffs' arguments that the plan fiduciaries opted for retail shares because they wanted to maximize their revenue-sharing revenue given the retail shares’ higher fees. The court said there was no evidence that the plan fiduciaries considered revenue-sharing when they selected the retail-class funds.
U.S. District Judge Stephen V. Wilson of the U.S. District Court for the Central District of California declared that Southern California Edison (SCE) and its plan fiduciaries violated the duty of prudence imposed by the Employee Retirement Income Security Act (ERISA) by not properly investigating the differences between selecting retail shares instead of institutional shares. Wilson’s 82-page ruling in Tibble v. Edison International was significant because the court accepted an often-advanced claim in 401(k) excessive fee suits that fiduciaries violate their ERISA-imposed duties by not adding less-costly institutional shares to their plans.
“Had the Investments Staff and the Investment Committees considered the institutional share classes when adding these funds in 2002 and weighed the relative merits of the institutional share classes against the retail share classes, they would have realized that the institutional share classes offered the exact same investment at a lower cost to the Plan participants,” Wilson contended. “Thus, Defendants would have known that investment in the retail share classes would cost the Plan participants wholly unnecessary fees.”
In regards to the three funds that were the focus of the fiduciary breach finding, Wilson turned aside defendants’ arguments that the fact they were taking the advice of Hewitt Financial Services (HFS) when they opted for the retail shares negated any fiduciary breach. (The three funds were the William Blair Small Cap Growth Fund, the MFS Total Return Fund, and the PIMCO (Allianz) RCM Global Tech Fund.)
Wilson commented: “While securing independent advice from HFS is some evidence of a thorough investigation, it is not a complete defense to a charge of imprudence.”
The court likewise rebuffed defense claims that they couldn’t look further into institutional shares because of mandatory investment minimums placed on those shares. Wilson argued that the fiduciaries should have asked for a waiver of the minimums and noted that the fund managers involved had never turned down a similar request from a similarly sized plan (The plan had $3,172,539,477 in assets as of December 31, 2005.) "Defendants' failure to do so constitutes a breach of the duty of prudence,” the court concluded.
Wilson rejected the plaintiffs' arguments that the plan fiduciaries opted for retail shares because they wanted to maximize their revenue-sharing revenue given the retail shares’ higher fees. The court said there was no evidence that the plan fiduciaries considered revenue-sharing when they selected the retail-class funds.
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