In a unanimous decision, the Supreme Court has ruled in favor of plan participants in the Edison International 401(k) plan who claimed company fiduciaries violated their duty to monitor three retail-class mutual funds.
Background and the Decision
The original suit (filed in 2007) claimed that Edison failed to fulfill its fiduciary responsibility to employees participating in its 401(k) plan because it offered several funds among the plan’s investment offerings that had higher fees than other materially equivalent and cheaper institutional shares of the same funds.
Edison, though, claimed that according to terms of the Employee Retirement Income Security Act (ERISA), the plaintiffs could only sue over funds that were among the offerings during the previous six years or less–and that several of the funds in question had been included for longer. The plaintiffs argued that fiduciary responsibility for plan choices is ongoing. The Supreme Court agreed with the plaintiffs.
There were two time frames within the suit, as Edison added three funds in 1999 and another three funds in 2002. While the lower courts found Edison in breach of its fiduciary duties for adding the funds in question in 2002, the same lower courts dismissed the funds added in 1999, because the suit was brought outside the 6 year statute of limitations.
In their decision, the Supreme Court stated, “ERISA’s fiduciary duty is derived from the common law of trusts, which provides a trustee has a continuing duty – separate and apart from the duty to exercise prudence in selecting investments at the onset – to monitor, and remove imprudent, trust investments.” The case has been sent back to the Ninth Circuit Court, which has been instructed to reconsider the claims, “recognizing the importance of analogous trust law,” according to the decision.
What Does This Mean for Plan Sponsors?
The two most important takeaways are an ongoing duty to monitor the investments and that the ongoing review should also include whether or not the fees of investments are prudent and match the intentions of the plan sponsor.
If a plan sponsor chose a more expensive share class with revenue sharing, they’ll need to explain why it was chosen over a less expensive institutional share class. For plan sponsors, they must remember that while plans are allowed to have revenue sharing payments in place to offset recordkeeping, advisory, and audit fees; they must make a concerted effort to review these agreements and be able to clarify why one investment option share class was chosen over another.
One important issue that the Supreme Court did not opine on was the specific scope of Edison’s fiduciaries to review and monitor the investments in question. For instance, how often should a plan sponsor review the investments? In our opinion, it should be at least annually.
Another important issue with this case is whether plan sponsors want the additional liability inherent with investments that contain revenue sharing. By choosing the lowest cost share class available for each investment option and charging plan fees to the participants, plan sponsors could limit the liability issues that have haunted others.