Recent multi-multi-million dollar class action settlements by Nationwide, Mass Mutual and Lockheed Martin are only the latest wakeup calls for plan sponsors who are coming under magnified scrutiny by employee groups and advocates. Although none of these companies have admitted to any wrongdoing, the courts are clearing the path for employee groups to publicly confront plan sponsors which usually leads to expensive litigation, settlements, and tarnished reputations. And now, a major case before the top court in our nation may just tilt the playing field completely to the advantage of emboldened employees seeking retribution for poor investment management performance.
We’ve written extensively on the necessity of prudence and due diligence on the part of plan sponsors in all aspects of managing plan investments, including the selection of funds based on their comparative costs. A case before the Supreme Court – Tibble v. Edison International - to be decided in June 2015, puts that particular ERISA mandate to the test in ways that could rewrite the manual for plan sponsors which, heretofore, think they have been playing by the rules.
The case involving an employee group’s claim that Edison International’s 401k plan charges excessive fees has reached the Supreme Court on appeal from a federal appeals court which ruled that a statute of limitations bars any claims against investments installed in the plan more than six years ago. The plaintiffs have argued that 401k participants should be able to sue based on the “imprudent investments” clause in ERISA regulations, regardless of the statute of limitations, citing that federal law requires a “continuing duty to provide only prudent investment in a plan regardless of when the investments were first selected.
At issue are six mutual funds selected by the plan sponsor that were of the more expensive retail class of funds rather than equivalent institutional class funds that were available at a much lower cost. Of course, Edison didn’t really help its case when it was discovered that it has been able to reduce its administrative costs by $8 million through reimbursements from the fund providers.
Edison attorneys are vigorously arguing that the statute of limitations applies to the six funds and that its purpose is to prevent costly and unnecessary litigation on plan decisions made years ago – unless there has been a specific change in circumstances that requires plan sponsors to reevaluate an investment decision.
Plan Sponsors Should Heed any Outcome of the Case
Regardless of the outcome of this case, plan sponsors need to be acutely aware of the increasing scrutiny of their fiduciary actions. Political, regulatory and media pressure is mounting to ensure maximum protections for employees. Of course, a ruling in favor of the employees could open a Pandora’s Box for plan sponsors with even the slightest vulnerability in their plan design and management. However, even a ruling in favor of Edison should be pause for plan sponsors to carefully evaluate their plans and their review process. In the current environment, nothing should be left to chance.