Inclusion of Mutual Funds, Short-Term
Investment Fund and Unitized Stock Fund
The Ninth Circuit also rejected the plaintiffs’ claims that
the defendants violated their duty of prudence by including
mutual funds, a short-term investment fund (similar to a
money market fund) rather than a stable value fund, and a
unitized fund for participants’ investment in Edison stock
in the Plan’s investment menu.
The Ninth Circuit joined the Seventh Circuit in refusing
to accept a bright line rule that fiduciaries should only offer
wholesale or institutional shares, instead of retail-class
mutual funds, because there are several factors a fiduciary
must consider in selecting a fund. Such factors included
whether the lower cost alternative may have lower returns,
higher financial risk, or offer fewer services. The court
also found that the expense ratio range for the Plan’s
approximate forty mutual funds of 0.03 to 2% was not out
of the ordinary. However, the court stated that its decision
assumed that the cost of revenue sharing did not drive
up the selected fund’s overall expense ratio and that the
defendants were not motivated to select the mutual funds
because of the financial benefit of revenue sharing.
As for the short-term investment fund, the court held
that the defendants were prudent because there was
uncontroverted evidence, such as discussions on the pros
and cons of a stable-value fund, showing that they had
investigated the merits of this investment. Additionally,
the inclusion of the unitized stock fund was not imprudent
because the evidence showed that the defendants were
vigilant in adjusting this fund when market conditions
changed.
Lessons for Plan Fiduciaries to Take Away from the Ninth Circuit’s Decision
The Tibble appellate decision contains an abundance of points for ERISA plan fiduciaries to consider. The following
are lessons that we believe plan fiduciaries should take away from this decision:
•
•
Before including any mutual
fund investments in a plan,
plan fiduciaries should ask
about any alternative class
shares and make reasoned
determinations on what class
share would be in the plan
participants’ best interests. If
the fiduciaries determine that
there are no salient differences
between the retail and
institutional class shares, they
should inquire whether the plan
meets the minimum investment
requirement for institutional
shares. If the plan does not
meet this requirement, the
fiduciaries should request that
this requirement be waived.
Plan fiduciaries should not
automatically exclude retail-class
mutual funds from their plans’
investment options. Selection
of retail-class mutual funds
is not automatically deemed
an imprudent decision in the
Ninth and Seventh Circuits,
but plan fiduciaries should
inquire about the availability
of alternative class shares and
make reasoned determinations
as to which share classes should
be included.
•
•
•
Plan fiduciaries should monitor
their service providers, including
investment consultants, to
ensure that they are analyzing
all aspects of the current and
recommended investment
options.
Plan fiduciaries should
document the reasons for all
decisions related to investments,
especially if they decide to
choose a more costly class
share. Note that the Ninth
Circuit stated that expense ratios
for mutual funds ranging from
0.03 to 2% were considered
ordinary.
Plan fiduciaries should review
the mutual funds in their plans
and determine whether to
include or remove certain funds.
This review should include
determining which mutual
funds have revenue sharing, the
amount of the revenue sharing,
and the costs associated with
these funds.
•
Plan documents should contain
language granting the plan
administrator, and perhaps
other fiduciaries, full discretion
to construe and interpret the
terms of the plan. This is
especially important for plans
in the Third, Sixth, and Ninth
Circuits, because courts in these
appellate circuits have applied a
deferential standard of review to
fiduciary duty claims as well as
to benefit claims.
•
Plan fiduciaries in the Sixth
or Ninth Circuits should be
aware that section 404(c) may
not protect them from liability
if a participant brings a claim
alleging imprudent selection of
investment funds.
If you have any questions on the Tibble decision or on fiduciary issues under ERISA,
please contact Brad Huss or Angel L. Garrett at Trucker Huss.
www.conferomag.com | 15