A California federal court’s ruling last week in Tibble v.Edison reaffirmed a decision reached eight years ago, when the samecourt said fiduciaries of the $3.9 billion Southern CaliforniaEdison 401(k) plan breached their obligations underthe Employee Retirement Income Security Act by offering retailshare classes of mutual funds when cheaper institutional shareswere available.

The Tibble case is considered a progenitor to ageneration of lawsuits against sponsors and service providers todefined contribution plans.

It is also the only 401(k) excessive-fee claim to be reviewed bythe Supreme Court.

In 2015, the Court unanimously ruled that plan fiduciaries hadan ongoing duty to monitor three mutual funds that were offeredoutside of ERISA’s statute of limitations.

Earlier this year, the 9^th Circuit Court of Appealsremanded the case back to the U.S. District for the CentralDistrict of California after unanimously ruling for theplaintiffs.

In defending the use of retail mutual funds, Edison’s attorneysargued retail shares could be prudently justified by a hypotheticalplan fiduciary. O’Melveny, a LosAngeles-headquartered law firm, represented the utilitycompany.

Revenue-sharing payments from retail shares of mutual funds havetraditionally been used to pay for plan administration. But severalrecent studies from service providers and trade organizations showfewer sponsors are using that practice.

Edison argued that without the revenue from retail shares, thecost of plan administration would have been passed on to planparticipants. Roughly $1 million from the retail shares was used topay for record-keeping. (The plan provider at the time was Hewitt —the firm was not named in the lawsuit.)

But that legal Hail Mary failed to persuade the court.

The revenue-sharing argument was not a part of Edison’s defenseduring the first trial, noted Judge Stephen Wilson. In the originaldecision, the court found that offsetting plan costs was not themotivating factor in the decision to use retail shares.

The court also rejected the argument that Edison could prudentlyuse revenue sharing to keep the company’s overall operating costsdown. In 2001, when plan fiduciaries chose the retail shares for 17mutual funds, the company reported $4 billion in cash on itsbalance sheet, according to court documents.

“No prudent fiduciary would purposefully invest in higher costretail shares out of an unsubstantiated and speculative fear thatif the plan settlor were to pay more administrative costs it mayreallocate all such costs to plan participants,” wrote JudgeWilson.

“For all 17 mutual funds at issue, a prudent fiduciary wouldhave invested in the lower-cost institutional-class shares,” addedWilson.

To whose benefit?

The economics of class-action lawsuits targeting definedcontribution plans is at the center of a contentious debate amongthe legal industry, consumer advocates, financial servicesproviders, and employers who voluntarily offer retirementplans.

The decision in Tibble fuels the core question at the heart ofthe debate: Who really benefits from the tens of millions indamages and settlements sponsors and providers have had to forkover in the past few years?

At least one plan sponsor advocate says it is the plaintiffs’bar.

In a recent letter to the Office of the Solicitor at the LaborDepartment, the American Benefits Council, which advocates forlarge sponsors of employee benefit plans, says plaintiffs’attorneys are applying a “shotgun” approach to litigation, “hopingthat at least some of their claims hit the mark.”

According to data cited in the letter, nearly $700 million inpenalties and settlements in fiduciary claims against definedcontribution plans were paid between 2009 and 2016.

Plaintiffs’ attorneys were awarded $204 million during thattime. Meanwhile, the average recovered award for individual planparticipants was $116.

The ABC is asking Labor to implore courts considering ERISAclaims to apply strict pleading standards under the Federal Rule ofCivil Procedure. That statute requires claimants to present factssupporting claims of damages in lawsuits.

Some courts apply stricter interpretations of the Federal Ruleof Civil Procedure than others. A lawsuit against Chevron’s 401(k) plan was recentlydismissed in the 9^th Circuit on the grounds that theplaintiffs failed to present adequate facts supporting theirclaim.

In its letter to the Labor Department, the ABC says applying astrict interpretation of pleading standards would eliminate “therecent trend of frivolous litigation, which is a drain on theprivate retirement system and more harmful than it is helpful toretirement savers.”

“The process for plaintiffs’ attorneys seems more focused on thebusiness of the lawsuit than on the proper use of a court toadjudicate a matter and to ensure that the participants areactually better off,” said Lynn Dudley, senior vice president forABC and the author of its letter to Labor, in an email toBenefitsPro.

Dudley says the fact that recent ERISA claims have shiftedfocus—from expensive investments, to allegedly expensiverecord-keeping, to claims targeting stable value funds—is evidencethat trial lawyers are putting their interests before planparticipants’.

“The plaintiffs’ bar would certainly not be looking for newangles if their goal were simply to see large plan sponsors changetheir design and offerings to lower fees,” added Dudley.

What Edison participants stand to get

The parties in Tibble v. Edison have partially agreed ondamages.

According to the decision, the plaintiffs’ class, which rangesbetween 17,000 and 24,000 current and former plan participants, isentitled to $7.5 million in damages between 2001 and January 2011,when all of the mutual funds in question were removed from theplan.

The parties are currently negotiating damages after 2011.

In a statement, Edison International and Southern CaliforniaEdison, said: “The funds in question have not been part of theofferings for employees since 2011 and the litigation has notraised any questions regarding the appropriateness of the currentportfolio of funds.”

The company also defended the quality of its 401(k) plan and itscommitment to employees’ retirement goals.

If the court finds no damages after 2011, a class of 17,000participants would see an average award of about $440. A class of20,000 participants would see an average award of $375.

The average payout to participants would of course increase ifthe court finds further damages after 2011.

Schlichter’s response

When the District Court first ruled for Edison plan participantsin 2009, the plaintiffs attorneys' request for $2.5 million in feeswas rejected. Throughout the 10-year course of the litigation, St.Louis-based Schlichter, Bogard & Denton represented theplaintiffs.

In its decision, the 9^th Circuit instructed theDistrict Court to reconsider the plaintiffs attorneys’ fees, “inlight of the significant amount of work that was required tovindicate an important principle,” according to courtdocuments.

Whatever amount the court signs off on, Jerry Schlichter, managing partner at Schlichter,Bogard & Denton, adamantly refutes the notion that hisfirm’s fees in the Tibble case, and in other ERISA claims, arelavish.

"These cases are massively expensive and involve open-endedcommitments of time and resources,” Schlichter told BenefitsPRO inan email.

The Tibble case demonstrates that — more than 10 years oflitigation, two appeals to the 9^th Circuit and a trip tothe Supreme Court, noted Schlichter.

“That is why there was never a case brought for excessive feesin the decades of 401k plans until we brought the cases in 2006,”added Schlichter.

A representative from Edison International and SouthernCalifornia Edison was not able to comment on how much the companyhas paid in legal fees.

Other ERISA legal specialists could only speculate on the amountof O’Melveny’s billable hours—2,500 on the low side, and twice thatand even more on the high side. At $600 an hour, at least $1.5million was spent on legal fees on the lower estimate.

According to Schlichter, the defense attorneys in Tibble v.Edison have been paid “far more” than his firm will receive.

“Plaintiffs’ attorneys are not the winners,” said Schlichter,who added that the defense team was paid “without risk” and as theyput time into the case.

He said that in Tussey v. ABB, another excessive-fee ERISA casebrought by Schlichter’s firm, defense attorneys were paid $42million through the original trial. That case is still pending in aMissouri federal court.

As far as the modest average award for plan participants inERISA cases, Schlichter says the benefits are real when consideringthe overall improvement in plan design and sponsors’ wideradherence to fiduciary standards in light of ERISA litigation.

“The winners are the employees and retirees in the plans becausethey will benefit for years to come from the changes made,” saidSchlichter.

He cited the Southern California Edison plan, which now useslower cost collective investment trusts for most of its planinvestments.

“They now have, and have for years, far less expensive fundsthan they would have otherwise had and will save tens of millionsin the future,” added Schlichter.

But the ABC’s Dudley is skeptical of the argument that the wavein litigation against defined contribution plans has forcedimprovements in plan design, and the use of lower-cost investments,trends seen throughout the retirement plan universe.

“Plan design and different offerings have been far more theresult of the work done to raise awareness of fees throughdisclosure, outreach to sponsors and participants, and new evidenceregarding behavioral economics,” said Dudley.