Looking at the 401(k) excessive fees case Tibble v. Edison, which went to the Supreme Court, who really benefits from the tens of millions sponsors and providers have paid?(Photo: AP)

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

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

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

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

Earlier this year, the 9th Circuit Court of Appeals remanded the case back to the U.S. District for the Central District of California after unanimously ruling for the plaintiffs.

In defending the use of retail mutual funds, Edison’s attorneys argued retail shares could be prudently justified by a hypothetical plan fiduciary. O’Melveny, a Los Angeles-headquartered law firm, represented the utility company.

Revenue-sharing payments from retail shares of mutual funds have traditionally been used to pay for plan administration. But several recent studies from service providers and trade organizations show fewer sponsors are using that practice.

Edison argued that without the revenue from retail shares, the cost of plan administration would have been passed on to plan participants. Roughly $1 million from the retail shares was used to pay 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 defense during the first trial, noted Judge Stephen Wilson. In the original decision, the court found that offsetting plan costs was not the motivating factor in the decision to use retail shares.

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

“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,” wrote Judge Wilson.

“For all 17 mutual funds at issue, a prudent fiduciary would have invested in the lower-cost institutional-class shares,” added Wilson.

To whose benefit?

 

The economics of class-action lawsuits targeting defined contribution plans is at the center of a contentious debate among the legal industry, consumer advocates, financial services providers, and employers who voluntarily offer retirement plans.

The decision in Tibble fuels the core question at the heart of the debate: Who really benefits from the tens of millions in damages and settlements sponsors and providers have had to fork over 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 Labor Department, the American Benefits Council, which advocates for large sponsors of employee benefit plans, says plaintiffs’ attorneys are applying a “shotgun” approach to litigation, “hoping that at least some of their claims hit the mark.”

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

Plaintiffs’ attorneys were awarded $204 million during that time. Meanwhile, the average recovered award for individual plan participants was $116.

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

Some courts apply stricter interpretations of the Federal Rule of Civil Procedure than others. A lawsuit against Chevron’s 401(k) plan was recently dismissed in the 9th Circuit on the grounds that the plaintiffs failed to present adequate facts supporting their claim.

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

“The process for plaintiffs’ attorneys seems more focused on the business of the lawsuit than on the proper use of a court to adjudicate a matter and to ensure that the participants are actually better off,” said Lynn Dudley, senior vice president for ABC and the author of its letter to Labor, in an email to BenefitsPro.

Dudley says the fact that recent ERISA claims have shifted focus—from expensive investments, to allegedly expensive record-keeping, to claims targeting stable value funds—is evidence that trial lawyers are putting their interests before plan participants’.

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

What Edison participants stand to get

 

The parties in Tibble v. Edison have partially agreed on damages.

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

The parties are currently negotiating damages after 2011.

In a statement, Edison International and Southern California Edison, said: “The funds in question have not been part of the offerings for employees since 2011 and the litigation has not raised any questions regarding the appropriateness of the current portfolio of funds.”

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

If the court finds no damages after 2011, a class of 17,000 participants would see an average award of about $440. A class of 20,000 participants would see an average award of $375.

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

 

Schlichter’s response

 

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

In its decision, the 9th Circuit instructed the District Court to reconsider the plaintiffs attorneys’ fees, “in light of the significant amount of work that was required to vindicate an important principle,” according to court documents.

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

“These cases are massively expensive and involve open-ended commitments of time and resources,” Schlichter told BenefitsPRO in an email.

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

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

A representative from Edison International and Southern California Edison was not able to comment on how much the company has paid in legal fees.

Other ERISA legal specialists could only speculate on the amount of O’Melveny’s billable hours—2,500 on the low side, and twice that and even more on the high side. At $600 an hour, at least $1.5 million 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 they put time into the case.

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

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

“The winners are the employees and retirees in the plans because they will benefit for years to come from the changes made,” said Schlichter.

He cited the Southern California Edison plan, which now uses lower cost collective investment trusts for most of its plan investments.

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

But the ABC’s Dudley is skeptical of the argument that the wave in litigation against defined contribution plans has forced improvements 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 the result of the work done to raise awareness of fees through disclosure, outreach to sponsors and participants, and new evidence regarding behavioral economics,” said Dudley.