Legal Brief – Plan Investment Fee Cases Gaining Some Ground

legal update401(k) participants of Southern California Edison (SCE) won a key legal victory against their employer when Judge Stephen V. Wilson of the US District Court for the Central District of California ruled that the selection of three retail-class funds constituted a fiduciary breach. The case centered on the plan’s decision to choose a retail share class of funds rather than their less expensive institutional share-class alternatives. As background, SCE sponsored a $2 billion retirement plan that utilized Hewitt as its recordkeeper and Hewitt’s Financial Services Divisions to advise them on plan investment related matters. The Court determined that SCE and its fiduciaries violated ERISA’s duty of prudence by not accurately and thoroughly studying the differences between selecting retail shares instead of institutional shares.

The defense argued that no fiduciary breach was committed because they were acting on the advice of Hewitt Financial Services when they placed the retail share classes of the funds they chose in their plan. The court rejected this argument as well as the defense’s claim that they were not eligible for the institutional shares because of the higher mandatory investment minimums that they did not meet. The Judge ruled that SCE’s fiduciaries should have requested a waiver of the institutional share’s investment minimums and by failing to do so, were in breach of their ERISA duty of prudence.

After the ruling, Judge Wilson instructed the plaintiffs’ lawyers to calculate the monetary damages incurred (as measured by the difference in investment expenses) by the fiduciaries’ actions. Wilson further directed that the damages begin from the date the plan initially invested in the retail funds (around July 2002) until present.

In the ruling, the court’s decision was far less deferential to the plan fiduciaries’ decisions than other jurisdictions have been in other plan fee cases. Many previous lawsuits have centered on claims that fiduciaries breached their ERISA duties by opting to invest in funds with unreasonably high fees, failing to disclose those fees properly to participants. This case uniquely provides some lessons to plan fiduciaries to contemplate. The outcome provides guidance to fiduciaries in evaluating and negotiating 401(k) plan fees, such as:

  • Large employers and retirement plans should make use of their economies of scale to negotiate for lower investment fees.
  • Solely relying on the recommendations from independent investment advisors may not meet fiduciary standards of prudence.
  • Plan fiduciaries should document their evaluation of fees and their investigation regarding the selection of 401(k) plan investment options. ERISA does not require fiduciaries to select the cheapest fund available rather they must select funds according to ERISA’s standard of prudence, placing importance on selection process and documentation.
  • Changes in fund names, ownership or management should trigger a thorough review of the fund.

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