9th Circuit Affirms Ruling in Retail Fund Dispute

March 25, 2013 (PLANSPONSOR.com) – An employer lost another legal battle for failure to ask about lower-priced investments for its retirement plan.

In Tibble v. Southern California Edison, the 9th U.S. Circuit Court of Appeals affirmed a district court’s judgment in a class action brought under the Employee Retirement Income Security Act (ERISA) by beneficiaries who alleged that their pension plan was managed imprudently and in a self-interested fashion. The panel held that the defendants did not violate their duty of prudence under ERISA by including in the plan menu mutual funds, a short-term investment fund akin to a money market, and a unitized fund for employees’ investment in the company’s stock. However, the panel affirmed the district court’s holding that the defendants were imprudent in deciding to include retail-class shares of three specific mutual funds in the plan menu because they failed to investigate the possibility of institutional-share class alternatives.  

The 9th Circuit also denied Edison defense that its actions were protected under ERISA section 404(c). According to the court opinion, Edison reads this statutory language as insulating it from all of beneficiaries’ claims because each challenged investment was a product of a “participant’s or beneficiary’s exercise of control,” by virtue of his selection of it from the plan menu. Disagreeing, the Department of Labor (DOL) directed the court to its previously announced interpretations (see “Solis Argues Prudence Claims Should not be Time-Barred”). In a 1992 regulation, it stated that in order to fall within section 404’s ambit, the breach or loss would need to be the “direct and necessary result” of the action by the beneficiary. A preamble that went through the notice-and-comment process and appeared in the agency’s final rule, stated that “the act of limiting or designating investment options which are intended to constitute all or part of the investment universe of an ERISA section 404(c) plan is a fiduciary function which . . . is not a direct or necessary result of any participant direction.”  

The appellate court affirmed the district court’s grant of summary judgment to Edison defendants on the beneficiaries’ claim that revenue sharing between mutual funds and the administrative service provider violated the pension plan’s governing document and was a conflict of interest. The district court found there was no evidence plan fiduciaries considered revenue-sharing in their selection of the retail funds (see “Court Buys Retail vs. Institutional Share Fee Claims”).  

The case drew much attention for its potential implications for plan sponsors, and groups representing many sides filed briefs in the case (see “ICI Submits Brief in Retail vs. Institutional Funds Case”).  

The 9th Circuit’s opinion is here.