Glen Tibble vs. Edison International

[joel]

Will the High Court's decision apply to governmental plans?

[Carol V. Calhoun]

No. The issue there was whether is whether a claim based on the ERISA prudence rules is barred by the ERISA statute of limitations. A governmental plan is not subject to the ERISA provisions concerning either prudence or statute of limitations. While many state laws governing prudence are similar enough to the ERISA prudence rules that state courts look to ERISA precedence in applying them, the statutes of limitations that apply are totally unrelated.

[joel]

How do we get the states to follow the prudence rules as decided by the 9th Circuit?

[mbozek]

They must pass legislation. Tibble really does not create new precedent in fiduciary duty. All that was upheld by the 9th circuit was the duty of fiduciaries to inquire whether there was a cheaper investment class (lower ER) in a fund that was available to plan participants. If there was then the fiduciaries had a duty to determine if the cheaper class was suitable/available for the plan. The 9th circuit decision did not mandate that plans must always select an index fund over retail funds.

[SeanTankarian]

I wonder though if there somehow will be a similar event as it relates to 457 plans? I've seen fees as high as 3% when you consider the expense ratio, plan administration fee, and managed account service. And what if a public sector plan sponsor given a nearly identical 457 plan but with substantially less costs but they don't change. Is that a breach of fiduciary duty on the plan sponsor's behalf?

[mbozek]

What law would apply to the 457 plan? I cant tell if you are referring to a public or non profit 457 plan.

[Peter Gulia]

Although a governmental plan’s fiduciaries who select service providers might be relieved from monetary liability under sovereign, governmental, or public-officer immunity, a governmental plan, its trust, and participants and beneficiaries might have remedies against those that receive excessive compensation.

If a fiduciary of a governmental deferred compensation plan allows a direct or indirect payment (or use of the plan’s property or rights) that results in a service provider receiving more than reasonable compensation, the service provider must restore the excess (with income) to the plan if the service provider knew, or should have known, that what was allowed was more than reasonable compensation for the proper services provided. This principle — that even a nonfiduciary third person has duties concerning a trust — has been recognized in the common law since at least 1471.

For this equitable principle, a person should know of a trustee’s or fiduciary’s breach when (i) he, she, or it knows facts that under the circumstances would lead an intelligent and diligent person to inquire into whether the trustee or fiduciary is breaching his, her, or its duty, and (ii) an inquiry, pursued with intelligence and diligence, would lead to knowledge (or reason to know) that the trustee or fiduciary is breaching his, her, or its duty. A service provider that receives a too-generous fee or other compensation might consider an old adage, “if it seems too good to be true, it probably is.”

In applying this idea, reasonable compensation might be something more, perhaps considerably more, than fair-market compensation. And differences in the services, and in the persons that provide them, can make the comparisons untidy. Moreover, if the facts are that similarly situated governmental plans are paying similar compensation, it might be difficult to prove that the compensation is unreasonable.

So far, the few settlements on litigations about governmental plans don’t give us enough information about how these claims would play if America’s plaintiffs’ lawyers pursued more of them.

[SeanTankarian]

Thank you Peter...that's very helpful.

[mbozek]

What settlements have there been on litigation over public plans for excessive fees. Problem that I have seen where the question is raised is sovereign immunity in suing a govt plan. Any administrator who provides services to a govt plan will have negotiated indemnification from the govt for liability for services rendered or payments received.

there is a separate question of whether a govt 457b plan with voluntary participation is even a retirement plan under state law.

NJ has a voluntary 457b plan which has been administered by an insurance company for years which some persons have contended that the fees are excessive but no action has been taken.

Plaintiffs lawyers do not want to sue Govt pension plans because the Govt has unlimited legal resources to defend the law suit where any recovery of legal fees would be on a contingency basis.

[Peter Gulia]

The litigations I mentioned were not about getting remedies from the plan fiduciaries, and deliberately did not name any of them or other governmental actors as a defendant.

Rather, the claims were about seeking disgorgement from a service provider that received compensation so obviously excessive that it could not have been within the range of reasonable compensation.

With a governmental plan, it's feasible for the plan's fiduciaries (even if many or all of the current fiduciaries are still the same as those who decided the imprudent approvals of the defendant's compensation) to support the plan's claim because the fiduciaries don't fear monetary liability and, if any counter-claim is brought against a fiduciary, will have a defense with attorneys' fees and expenses paid by the government.

As I mentioned, there are very few cases. And it's not easy for a plan to find a good plaintiff's lawyer who both understands how to pursue the plan's claim and is wiling to provide her services on no more compensation than a hope of producing a settlement that results in a class-counsel fee.

Further, it's often difficult to prove that the compensation was unreasonable.

[joel]

According to Tibble it is a breach of prudence to have participants invest in retail price funds and then have a portion of these fees/commissions show up as a credit when the Recordkeeper bills the Plan Trustees for recordkeeping service. This practice, commonly referred to as "revenue sharing" has no place, according to Tibble, in a plan governed by ERISA.

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Re: New Jersey State Employees Deferred Compensation Plan (Plan)

For its first 25 years the Plan was managed in house by the NJ Division of Pensions and Benefits as Plan Administrator and the Division of Investment as Investment Provider. The investment line-up consisted of 4 separate accounts. Cost to the worker: EIGHT BASIS POINTS!!! This suddenly changed on January 2, 2006 when the Trustees handed over the Plan's operation to Prudential Retirement with its retail funds line-up.

How would the NJ Courts decide should a class action, based on Tibble, be filed?

[My 2 cents]

Is the plan subject to ERISA? If not, is Tibble relevant?

[mbozek]

Joel:

where does the tibble decision state that it is imprudent for participants to invest in retail funds. You and Dan solin need to read the Tibble decision of the 9th circuit as well as section 408b2 of ERISA before posting.

My two cents: Tibble does not apply to Public plans but Joel does not understand what the tibble decision stands for.

[joel]

mb: You have a sharp tongue and you will be called on it. You do not own this website so stop behaving as you do!

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Tibble says the menu cannot consist of retail funds when there are institutional shares of the same fund. This is why Tibble was awarded $377,000 in damages. But you already know this, don't you!

MB: You appear to be one that makes a living in the retail part of the mutual funds industry but makes sure when investing for his own account never to buy retail.

The Prudential retail funds sold to NJ state employees are no where to be found on the investment menu of Prudential's own 401(k) Plan. Why?

[My 2 cents]

Is it not the case that governmental plans, not being subject to ERISA and its standards of fiduciary conduct, cannot be found in a court of law to have violated ERISA's fiduciary standards? That is the point of my questions.

[John Feldt ERPA CPC QPA]

Many laws passed by the government, such as ERISA, are not applied to the lords and ladies and other noblemen of the government, but instead meant only to help the wee people outside the castle walls.

[My 2 cents]

Many laws passed by the government, such as ERISA, are not applied to the lords and ladies and other noblemen of the government, but instead meant only to help the wee people outside the castle walls.

I suspect that they would if they could, but the federal government might not have the authority, under the constitution, to (for example) require New Jersey to vest its employees after no more than 5 years of service. In the topic at hand, does the federal government have the authority under the constitution to require states and their subdivisions to adhere to federal standards concerning what is acceptable with respect to the handling of pension plan assets?

[joel]

My 2 cents,

Your question makes the discussion/debate crystal clear---let's continue.

Joel

[joel]

It's a given that governmental plans are exempt from ERISA.

With that said, does it not stand to reason that inasmuch as the states look to ERISA for guidance on prudence rules they would amend their statutes to conform to Tibble? Or, in the alternative, the Boards of Trustees of governmental plans could simply trash their retail class funds in favor of no-load institutional class shares.

[GMK]

I can't get over seeing:

the terms "standards of fiduciary conduct" and "governmental" in the same sentence,

criticism of mbozek for posting accurate, knowledgeable answers to each question, and

the idea that no-load institutional class shares do not offer revenue sharing.

Guess I'm not gonna be much help here, but it was interesting reading for a while.

[mbozek]

In order to clear up the confusion I am submitting a summary of the Tibble case from the Sidley law firm on the question of prudence in selecting retail mutual funds instead of cheaper institutional funds.

"The court declined to hold that retail mutual funds are categorically imprudent, recognizing that such funds offer benefits over their institutional counterparts, that fiduciaries are not required to offer only "wholesale" funds and that expense ratios of the retail funds Edison offered were not so out of the ordinary as to be inherently imprudent. P40-43 of the opinion Citing Loomis v. Exelon Corp, 658 F3d 667, 671-672 and Hecker v. Deere 556 F3d 575, 586.

ERISA_UPDATE_041513.pdf

[mbozek]

In response to my two cents questions:

1. Because Public employers are statutorily exempt from ERISA they cannot be sued for violating ERISA even if they voluntarily adopt a plan subject to ERISA.

2. Under numerous supreme ct decisions federal employment discrimination laws do not apply to the states because the 11th amendment prohibits states from being sued in federal court. The one exception is FMLA which applies to pregnancy discrimination under the 14th amendment.

[joel]

Matt Bozek;

Why did the Court rule that Glenn Tibble, et.al; is entitled to $377,000 in damages?

[jpod]

Because it found, factually, that putting a few (three, I think) of the funds on the platform was imprudent where there were share classes with lower x ratios available.

[mbozek]

Not exactly. See P 3 of the sidley article which indicates that the breach of fiduciary duty occurred because due diligence was not conducted as to whether the 3 retail funds were suitable for the plan.

" The court found insufficient evidence that the defendants or their investment consultant had utilized a prudent selection process. Citing evidence that the institutional funds offered lower fees with " no salient differences in investment quality or management" the court held that defendants had failed to show reasonable reliance on the consultant's advice. The court observed that "this might have been a different case had defendants shown that the advisor "engaged in a prudent process " by presenting evidence of the advisor's specific recommendations to the defendant committee about the funds, the scope of the advisor's review, whether the advisor considered both retail and institutional share classes, or what questions or steps the defendants used to evaluate the recommendations."

The court's decision indicates that the liability for a breach of fiduciary duty could have been avoided if the investment consultant had performed due diligence in reviewing the three funds and presenting evidence to the committee of why the retail investments were suitable for the plan. There is a back story that the consultant did not look into whether cheaper classes of funds were available because the consultant believed that the plan's assets were not high enough for the fund providers to offer the lower cost share classes.

This decision makes clear that plan fiduciaries must periodically review funds used in plan to determine if they are suitable and have plan consultants document the review process including searching to see if there are lower cost funds and documenting reasons for using the higher cost fund when a lower cost fund is available.