Tibble’s Trials Near the End With a Win

Nearly a decade to the day that Glenn Tibble, William Bauer, William Izral, Henry Runowiecki, Frederik Sohadolc, and Hugh Tinman, Jr. filed their excessive fee class action known as Tibble v. Edison, they may be nearing the conclusion of a case that has gone all the way to the United States Supreme Court and back.

First a little history.  Last December, the 9th U.S. Circuit Court of Appeals in San Francisco ordered a U.S. district court – this very one – to rehear the Tibble vs. Edison International excessive 401(k) fee case. At that point, the opinion, written by Judge Milan D. Smith Jr., vacated the Los Angeles District Court’s ruling that the case could not proceed because of a statute of limitations on three of six funds in question with the $2 billion plan. That decision arose from a decision by a majority vote among the 9th Circuit’s active, non-recused judges who determined that the case be reheard “en banc.” The plaintiffs, represented by the law firm of Schlichter, Bogard & Denton, had successfully persuaded the U.S. Supreme Court that ERISA’s six-year statute of limitations extended beyond the initial decision to  place certain retail class mutual funds on the plan menu in 1999.

Current Case

Picking up the current case was Judge Stephen Wilson in the United States District Court for the Central District of California, who began by noting that the issue here involved 17 mutual funds that were chosen as investment options for the plan in March 1999. For each of those funds, the Edison plan fiduciaries initially selected the retail shares instead of the institutional shares, or failed to switch to institutional share classes once one became available. Here the plaintiffs contend that the fiduciary defendants breached their 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, the employer paid the entire cost of Hewitt Associates’ record-keeping services, but with the addition of the mutual funds to the Plan, however, certain revenue sharing was made available to Southern California Edison Company (SCE) that could be used to offset the cost of Hewitt Associates’ record-keeping expenses.

The funds at issue remained in the plan beyond August 16, 2001 (the relevant date for the statute of limitations), and many remained in the Plan until February 1, 2011, when the plan fiduciaries removed all mutual funds from the plan. Judge Wilson noted that, for 14 of the funds, institutional shares were available for years before August 16, 2001, and for the other three, institutional shares became available during the statutory period. The court noted that it was undisputed that the plan fiduciary/defendants did not switch the plan mutual funds from retail-class to institutional-class because they did not consider the institutional shares until 2003.

“Wrong” Full?

The court here noted that this time around, the plan fiduciaries concede that they were in the wrong in not considering institutional shares, but they argued that a hypothetical prudent fiduciary who did consider the institutional shares would have still invested in at least some of the retail share classes.  The defendants here asserted that the issue of share classes and revenue-sharing was discussed, if not agreed to, during collective bargaining negotiations between Edison and plan participants in 1999, and that, because the unions accepted this bargain, and because for most of the 17 funds at issue, “fees charged to Plan participants by the ‘retail’ class were the same as the fees charged by the ‘institutional’ class, net of the revenue sharing paid by the funds to defray the Plan’s recordkeeping costs,” that investment in the retail share classes was prudent.

Judge Wilson noted that here the defendants also asserted that a hypothetical prudent fiduciary would “have compelling, affirmative reasons not to switch share classes in the circumstances the fiduciaries found themselves in here” for several reasons, that without the revenue-sharing other plan changes might have been implemented, or that making the change would have cost sums significant enough to require other tradeoffs.

The court noted that in the first trial it found that SCE’s decision to invest in retail-class shares instead of institutional-class shares of the same fund violated its duty of prudence – a decision it noted was upheld by the Ninth Circuit – and that SCE this time around “provides no reason to reconsider this finding for the 17 mutual funds at issue on remand.” However, the court noted that for the first time SCE argues that they had a right to invest in the retail-class shares to take advantage of revenue sharing, but found several problems with this argument, notably that it could have been made eight years ago. The court also took issue with the argument that merely by informing participants that revenue-sharing was available, they could choose higher-cost retail shares that had revenue sharing instead of the institutional shares that did not, and also rejected an argument that it was actually better for the Plan participants for them to do so, since “in a hypothetical scenario in which Edison had no revenue sharing to defray recordkeeping costs it would have reallocated Plan administrative costs to Plan participants.”

The court noted that accepting this argument would require the court to accept that a $1.1 million increase in recordkeeping costs would motivate Edison to restructure its plan, and it was not inclined to do so based on what it described as “speculative and unsupported testimony that Edison may have been cash-strapped, and thus would need to cut a million dollars in administrative costs by relocating the costs to Plan participants.” Instead, the court said that “no prudent fiduciary would purposefully invest in higher cost retail shares out of an unsubstantiated and speculative fear that if the Plan settlor were to pay more administrative costs it may reallocate all such costs to Plan participants,” and that “for all 17 mutual funds at issue, a prudent fiduciary would have invested in the lower-cost institutional-class shares.”

When “Fall?”

Having found that a prudent fiduciary would have invested in the institutional-class shares for each mutual fund, the court turned its attention to when the breach actually occurred – and since it said the statute of limitations precludes plaintiffs from recovering for the breach that occurred at the time of the investment, plaintiffs must establish that defendants breached their ongoing duty to monitor. Applying guidance from the Supreme Court in Tibble I, the court held that the defendants were liable for breaching the duty to monitor from August 16, 2001, onward.

Judge Wilson noted that he did not mean to suggest that in all duty-to-monitor cases a fiduciary would breach their duty the day a fund becomes imprudent, and acknowledged that “the reasonable discovery of an imprudent investment may not occur until the systematic consideration of all investments at some regular interval.” That said, he noted that the facts here constituted an “extreme situation,” and that the fiduciary/defendants “have never disputed that a reasonable fiduciary would be knowledgeable of the existence of the institutional shares for the mutual funds at issue.” Rather, he noted that the defendants “… always knew, or should have known, institutional share classes existed.”  Moreover, he noted that while there might be times when a reasonable fiduciary “suspects an imprudent investment, but waits until she engages in a regularly scheduled systematic review to confirm her suspicion and properly reinvest the funds elsewhere,” this was not that sort of case. “Because the institutional share classes are otherwise identical to the retail share classes, but with lower fees, a prudent fiduciary would know immediately that a switch is necessary” – and that, knowing that institutional share classes provide identical investments at lower costs – would switch share classes immediately.

Likely looking to mitigate damages, defendants argued that once the decision was made to switch, 2-5 months would be required to actually make the switch.  However, Judge Wilson wasn’t buying that argument either, writing that “…as a breaching fiduciary, Defendants would be liable in making Plaintiffs whole regardless of how long it takes to cure the breach.” “Thus, even if Defendants successfully showed it would take months to make the switch, they are nonetheless liable for losses on each mutual fund at issue either beginning on August 16, 2001, or on the day after 2001 that institutional funds became available,” he wrote.

Damages Determination

While he explained that the parties stipulate that damages up until January 2011 is appropriately calculated by calculating the profits that the plan would have accrued if it invested in the available institutional share classes instead of retail share classes, and that this amount is $7,524,424.  “However,” he wrote, “the Plan removed all mutual funds in 2011—thus, the lost investment opportunity from 2011-present cannot be as directly calculated as the losses from 2001-2011.”

Here he explained that the parties propose four methods to do so: (1) the returns of the S&P 500 index fund, (2) the returns of the Plan as a whole, (3) the returns of the target date funds, and (4) the statutory post-judgment interest rate set out in 28 U.S.C. § 1961. After a brief discussion of each of these, the court accepted the stipulated damage amount of $7,524,424 for 2001-2011, determining that for the period of 2011 to present, the plan’s overall returns – including the brokerage window – would be used to calculate damages.

“If the parties cannot stipulate to a number, they shall each file a five-page brief explaining the discrepancy in their calculations contemporaneous with the proposed judgment,” Judge Wilson wrote.  “This is only if there is a dispute in actual calculations and is not an opportunity to re-litigate any issues decided in this case—doing so shall result in sanctions,” he said.

Lastly, Judge Wilson said the court would reconsider a motion for attorney’s fees—and that plaintiffs were expected to file their motion within 60 days.

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