The U.S. Supreme Court ruled unanimously on May 18 that employers have a continuing duty under ERISA to monitor investments and to remove imprudent ones. TIbble v. Edison International (the subject of a previous report on LBN) is the first 401(k) ever decided by the Court. The Supreme Court’s ruling overruled a Court of Appeals decision limiting the number of employees who could make claims. The decision could make it easier for 401(k) participants to sue their employers for excessive fees they have to pay to plan managers. Jerry Schlichter, St. Louis, represents the plaintiffs in the Tibble case and discusses the Court’s decision in this report.
Schlichter explains that he represents employees and retirees of Edison International. The 401(k) plan involves several billion dollars. Schlichter says that the contention is that plan participants should get better rates than “retail fees that a $500 investor would pay.” The trial judge found one retail fund to be excessively priced, given that institutional rates were available to the company. As to three other similar funds, the judge found that no claim could be brought against Edison because the funds had been in the plan for more than six years.
Schlichter says that the Supreme Court adopted the theory urged on behalf of his plaintiffs that the company has an ongoing duty to monitor the fees and performance of the 401(k) funds and to assure that the investments and fees are appropriate. Edison had a fiduciary duty under ERISA to is required to conduct a regular review of its investment with the nature and timing of the review contingent on the circumstances.
Schlichter notes that the judges were “very engaged” during oral argument. This was their first-ever 401(k) case. “It’s important because the 401(k) system has become America’s retirement system.” Defined benefit plans “have gone the way of the dinosaur.” The new system involves employee payments, employer matching payments, and the money is at risk, unlike the old pension plans where retirement funds were guaranteed.
As to why a plan would select retail funds over institutional funds, the funds offered “revenue sharing.” Schlichter describes the system as “kickbacks to pay for the cost of record keeping.” Schlichter says his clients don’t have solid information on the cost of the funds in which their money was invested, but they should have been able to get much lower fee rates than they were paying. A 1.5% fee compounded over thirty years can amount to a lot of money that could have been used for retirement.
Schlichter says that a lot of employers do a very good job for their employees in managing the 401(k) plan. Other do not because “it’s not their money.” But the Tibble case will make it clear to all employers that they have a continuing duty to monitor their 401(k) plans and carry out their fiduciary duty to their employees to assure that the funds and fees are appropriate. Schlichter notes that both AARP and the Solicitor General filed briefs his support of his clients’ position because of the importance of the case.
Jerome J. Schlichter is the founding and managing partner of Schlichter Bogard & Denton, LLP, St. Louis, MO. He has been repeatedly elected by his peers for inclusion in "Best Lawyers in America" and is listed again in the 2015 edition. Jerry has been designated legal counsel for the Brotherhood of Locomotive Engineers for many years and is currently designated legal counsel for the United Transportation Union. The Legal Broadcast Network is a featured network of the Sequence Media Group.