HR Vice President Liable for Fiduciary Breach

 

By Jeffrey Rhodes September 28, 2017
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​Administrators of the 401(k) plan of a California energy company, including the vice president of HR, are liable for breach of fiduciary duty for their investment choices after the U.S. Supreme Court ruled that such a breach would extend the statute of limitations under the Employee Retirement Income Security Act (ERISA).

A group of former employees of Midwest Generation LLC, a subsidiary of Southern California Edison Company (SCE), filed suit against SCE and related parties to recover alleged financial losses suffered by the 401(k) plan and obtain injunctive and other relief. These plaintiffs, led by named plaintiff Glenn Tibble, sought recovery under ERISA against SCE's parent company, Edison International; the Edison International Trust Investment Committee; the SCE Benefits Committee; and SCE's vice president of human resources, among others, for alleged breaches of their fiduciary duties.

The 401(k) plan was started in 1982 and maintained for all employees of Edison-affiliated companies. The plan is a defined contribution 401(k) savings plan, wherein participants' retirement benefits are limited to the value of their own individual investment accounts, which is determined by market performance of employee and employer contributions, less expenses.

[SHRM members-only toolkit: Designing and Administering Defined Contribution Retirement Plans]

At issue were 17 mutual funds that the defendants selected as plan investment options in March 1999. For each of the 17 funds, the defendants initially selected the retail shares instead of the institutional shares, or failed to switch to institutional share classes once they became available. In general, institutional share classes are available to institutional investors, such as 401(k) plans, and may require certain minimum investments. Institutional share classes often charge a lower fee because the amount of assets invested is far greater than for a typical individual investor.

Except for the expense ratio, including revenue sharing, the retail share class and institutional share class are managed identically. The plaintiffs contended that the defendants breached the duty of prudence by not switching the retail shares of the 17 funds at issue to institutional shares.

Before the addition of the mutual funds to the plan in 1999, SCE paid for the costs of the plan's record keeper, Hewitt Associates LLC. Hewitt Associates' services included mailing prospectuses, mailing individual account balances, providing participant statements, operating a website accessible by plan participants and answering inquiries from plan participants regarding their investment options. With the addition of the mutual funds to the plan, however, certain revenue sharing was made available to SCE through the retail shares that could be used to offset the cost of Hewitt Associates' record-keeping expenses. Revenue sharing is a practice by which mutual funds collect fees from mutual fund assets and distribute them to service providers to pay for distribution expenses and shareholder services expenses.

The use of revenue sharing to offset Hewitt Associates' record-keeping costs was discussed with the employee unions during the 1998-99 negotiations. This arrangement was disclosed to plan participants on approximately 17 occasions after the practice began in 1999.

The plaintiffs filed a class action on Aug. 16, 2007, and class certification was granted on June 30, 2009. The defendants sought summary judgment in May 2009, and it was granted in part by the court. Among other things, the court ruled that some of plaintiffs' claims were barred by the statute of limitations mandated by ERISA Section 1113. This section imposes a six-year statute of limitations, which, the court ruled, barred claims relating to events occurring before Aug. 16, 2001.

The court found that from July 2002 to October 2008, investment selections for the plan demonstrated the general trend toward selecting mutual funds with reduced revenue sharing. However, the court found that three mutual funds added after 2001 should not have been selected in their retail classes, finding that a prudent fiduciary would have invested in the institutional share classes rather than the retail share classes.

On appeal, the U.S. Supreme Court determined that the court had erred in applying the statute of limitations to bar a claim of breach of fiduciary duty without considering the nature of the fiduciary duty. The Supreme Court found that a fiduciary's allegedly imprudent retention of an investment is enough to trigger the tolling of the statute of limitations for a breach of fiduciary duty claim.

On remand to the district court, the court found that the defendants were not reasonably prudent in terms of the selection of retail shares rather than institutional shares for all 17 mutual funds at issue. The parties stipulated that the profits that the plan would have accrued if it had invested in the available institutional share classes instead of retail share classes from March 1999 through January 2011 were $7,524,424. In addition, the court determined that additional damages were available since January 2011 based on the plan's overall returns during that time. The district court also found the plaintiffs were potentially entitled to their attorney fees.

Tibble v. Edison International, C.D. Cal., CV 07-5359 SVW (AGRx) (Aug. 16, 2017).

Professional Pointer: When dealing with 401(k) plans, HR representatives must be very careful to make sure that employees' interests are represented in every aspect of the plan. Overlooking these interests, even with a small matter such as administrative fees, can result in significant liability.

Jeffrey Rhodes is an attorney with Doumar Martin in Arlington, Va.

 

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