Ninth Circuit Finds Trustees Violated Fiduciary Duty in 401(k) Plans

In recent years, the Department of Labor has required greater transparency with respect to fees investment managers charge to plans and plan participants. As part of their fiduciary duties, Trustees must review the fee arrangements to determine whether the fees for a particular investment are reasonable. In Tibble v. Edison, a group of plan participants filed a class action against an employer 401(k) plan challenging the revenue sharing procedures of six mutual funds, alleging the fiduciaries breached their fiduciary duties of loyalty and prudence by investing in retail share classes with higher fees than in institutional shares with lower fees. The Ninth Circuit made the following rulings:

  • Duty of Prudence:  The Ninth Circuit affirmed the District Court’s holding that the defendants violated their duty of prudence by including retail class shares of three mutual funds because they failed to investigate the possibility of institutional funds as an alternative. The Ninth Circuit reached this decision because there was no evidence that the fiduciaries ever considered the differences between the classes of shares before making the investment decision, and because no advantage is offered by the more expensive shares of retail funds over the less expensive institutional funds such that a hypothetical prudent fiduciary would have made the same decision. The Ninth Circuit found that based on the evidence, a prudent fiduciary would have realized the institutional shares offered the same investment at a lower cost to plan participants. The Ninth Circuit awarded plaintiffs with damages including lost investment opportunity of the money they would have invested had they not been invested in the more expensive retail shares.
  • ERISA § 404(c) Safe Harbor:  The Ninth Circuit held that the ERISA § 404(c) safe harbor, which provides for individual control over assets, did not apply.  The Ninth Circuit adopted the DOL regulations that state that the act of “designating investment options” does not shield fiduciaries from liability.
  • Revenue Sharing:  The Ninth Circuit noted that revenue sharing in and of itself does not constitute a prohibited transaction under 406(b)(3) because the DOL “exempts revenue-sharing payments from the definition of consideration.”
  • Retail Funds v. Institutional Funds: The Ninth Circuit rejected a bright line rule that a fiduciary should only offer institutional mutual funds.
  • Duty of Loyalty:  The Ninth Circuit rejected plaintiffs’ claim that the fiduciaries breached their duty of loyalty because there was no evidence that the fiduciaries selected the retail shares in order to bring more revenue sharing into the plan.
  • Investment Manager Fees:  The plaintiffs also alleged that the fiduciaries breached their fiduciary duty by charging participants excessive fees to invest in the Money Market Fund. The Ninth Circuit rejected plaintiffs’ claim, holding that the defendants reviewed the fees periodically, and even if they hadn’t, a hypothetical prudent fiduciary would have found the fees to be reasonable. Furthermore, the Ninth Circuit gives deference to the fiduciaries in a breach of fiduciary duty case.  

For more information about fiduciary duty, please contact your Trust Fund counsel.

By Kristina M. Zinnen

Legal Developments