However, Solis asked the 9th U.S. Circuit Court of Appeals to reconsider the district court’s decision that most of the plaintiffs’ prudence and prohibited transaction claims were barred because the fiduciaries first selected the challenged investments or entered into the challenged transactions more than six-years before the suit was filed. “The Plan fiduciaries had a continuing obligation to manage Plan investments and eliminate imprudent ones, just as they had a duty to refrain at all times from self-dealing and other transactions that violate ERISA. Accordingly, they could not turn a blind eye to the impropriety of causing the Plan to pay unreasonable higher fees and simply wait out the statutory period. Nor could they continue on an imprudent or otherwise prohibited course of conduct forever merely because they had engaged in such conduct for more than six years,” the brief stated.
In addition, Solis said the district court correctly held that ERISA section 404(c) and the Secretary’s 404(c) regulation provide a safe harbor for fiduciaries against losses only when they result from the participant’s exercise of control and not from the losses attributable to a fiduciary’s own misconduct. Even where the participants in a defined contribution plan are given control over investment decisions among the options presented to them, plan fiduciaries must still act prudently in deciding what investment options ought to be offered to the plan’s participants. For this reason, the district court correctly declined to apply section 404(c)’s pass from liability to the defendants’ conduct in this case.
But, Solis argued that the district court erred in relying on Department of Labor Advisory Opinions to conclude that the plan sponsor was sufficiently independent of the investment committees that transactions undertaken by those committees could not constitute prohibited transactions under ERISA section 406(b)(3) even if they benefited the plan sponsor by allowing it to offset amounts it would otherwise owe to the plan recordkeeper. “ERISA section 406(b)(3) flatly forbids fiduciaries from receiving any personal consideration from any party dealing with a plan in connection with transactions involving the assets of the plan, and the Labor Department Advisory Opinions merely recognize that a fiduciary does not violate this provision by receiving, as part of its compensation, fees specifically approved by another independent fiduciary. These Advisory Opinions were not addressed at situations where, as here, the fiduciaries engaging in the transactions are the officers and directors of the corporate fiduciary that is receiving the consideration,” the brief said.
The case was brought by current or former employees and participants in the Edison 401(k) Savings Plan, who claimed that, by choosing investment options for the plan that charged excessive fees and that benefitted the fiduciaries and other parties in various ways, the defendants violated their fiduciary duties of prudence and loyalty under ERISA, failed to administer the Plan in accordance with the plan documents, and engaged in prohibited transactions.
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 ERISA by not properly investigating the differences between selecting retail shares instead of institutional shares (see Court Buys Retail vs. Institutional Share Fee Claim).
Wilson also said the fiduciaries should have asked for a waiver of mandatory investment minimums, and noted that the fund managers involved had never turned down a similar request from a similarly sized plan (see IMHO: The Duty to Ask).Solis’ amicus brief is here.