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Edison International must pay more than $7.5 million to compensate employees for its decision to include high-fee retail share mutual funds in its 401(k) plan when identical institutional share classes were available at lower cost ( Tibble v. Edison Int’l , 2017 BL 287522, C.D. Cal., No. 2:07-cv-05359-SVW-AGRX, 8/16/17 ).
This decision by a federal judge in California is only the second judgment reached after trial in a case accusing a 401(k) plan fiduciary of imprudent and disloyal investment selection. The first involved a $13.4 million judgment against ABB Inc. that was upheld by an appeals court in 2014.
The judge said it was imprudent for Edison to include 17 mutual funds in its 401(k) plan that could have been obtained at lower cost. Because Edison should have made the switch “immediately,” the judge said damages could be calculated from the day the statute of limitations began to run—exactly 16 years before the judge’s Aug. 16 decision.
The parties agreed that damages between 2001 and 2011 were about $7.5 million, and the judge ordered them to calculate damages from 2011 onward by comparing the returns of the disputed funds to the returns of the plan as a whole during that period.
In finding Edison liable under the Employee Retirement Income Security Act for putting expensive retail share classes in its 401(k) plan, the judge’s decision gives a boost to a number of pending lawsuits making similar claims against employers, including T. Rowe Price, New York University, and Northwestern University. A federal judge found similar claims viable against Anthem Inc. in March.
The judge’s decision against Edison comes exactly 10 years after the case was first filed in 2007. Since that time, the case has seen two trials, multiple trips to the U.S. Court of Appeals for the Ninth Circuit, and a significant 2015 U.S. Supreme Court ruling making it harder for 401(k) plan fiduciaries to have lawsuits challenging particular investment funds dismissed as untimely.
The judge gave the Edison investors a big win when he found that Edison’s breach of duty occurred on the earliest possible date that it could have chosen institutional share classes over retail. This is significant because it increases the amount of money investors can recover.
The judge cautioned that not all fiduciary breach cases will compel this conclusion, because fiduciaries aren’t expected to take a “daily accounting of all investments.”
However, Edison’s case presented an “extreme situation,” the judge said, because Edison “always knew, or should have known, that institutional share classes existed.”
Although the decision is a win for investors in Edison’s 401(k) plan, the judge declined to use their proposed method for calculating damages that occurred after the Edison plan removed all mutual funds in February 2011. Specifically, the investors favored comparing the challenged mutual funds’ returns to the returns of the S&P 500 index, which has nearly doubled since February 2011.
This comparison would be “unambiguously irrational,” the judge said, because there’s no indication that participants who invested in the disputed mutual funds moved their investment to the plan’s S&P 500 index fund, which the judge said made up a “rather small portion” of the plan’s assets.
The better comparison would be between the returns of the challenged mutual funds and the returns of the plan as a whole, the judge said. It’s a “reasonable approximation that these investors, who already invested in diversified mutual funds, continued to invest in a diversified strategy that approximates the Plan’s returns,” the judge said.
Judge Stephen V. Wilson of the U.S. District Court for the Central District of California wrote the decision.
A spokesman for Edison and its subsidiary, Southern California Edison, told Bloomberg BNA the companies are reviewing the decision.
“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 spokesman said.
“Edison International and Southern California Edison understand the importance of their 401(k) plan to employees’ retirement goals,” he continued. “We have consistently provided a wide array of high-quality investment options in the 401(k) plan.”
Jerry Schlichter, the attorney representing the Edison investors and investors in several pending lawsuits challenging 401(k) plan fees, praised the decision in a statement.
“After ten years of litigation, and a unanimous favorable ruling by the U.S. Supreme Court, we are pleased that the court agreed with our position,” Schlichter said. “We look forward to continuing our work on behalf of the employees and retirees involved in this case, so that they may soon see a resolution and find relief.”
Schlichter is the founding and managing partner of Schlichter Bogard & Denton in St. Louis. His firm currently represents 401(k) plan participants suing Anthem and Oracle Corp. and university employees challenging the retirement plans of 12 prominent colleges, including Yale, Vanderbilt, and the University of Southern California.
O’Melveny & Myers LLP represents Edison.
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