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Friday, February 27, 2015

All About Share Classes: the Supreme Court Ponders 401ks

News summary by MFWire's editors

The nine justices of the Supreme Court of the United States are trying to wrap their head around how much monitoring employers have to do of their 401(k) plans, and mutual fund share classes are at the center of the debate.

On Tuesday morning, our nation's highest court heard oral argument in Tibble v. Edison, one of a number of lawsuits filed by the same St. Louis law firm, Schlichter Bogard & Denton, that accuse different giant employers of having excessively high fees in their 401(k) plans. In the current case, the fight is over retail mutual funds that were used in a multi-billion-dollar 401(k) plan even though institutional shares of the same funds did exist.

The Associated Press, Bloomberg, Financial Advisor magazine, Ignites, InvestmentNews, Institutional Investor, the Los Angeles Times, Pensions & Investments, Reuters, the Wall Street Journal, and our sister publication 401kWire all covered the one-hour oral argument. Attorneys representing Edison itself, Edison's employees, and the federal government all got a grilling from the justices. You can read the official transcript here.

The Supreme Court agreed to hear the case to address a very specific question: whether or not several mutual funds added to the Edison 401(k) plan in 1999 could be part of the court battle or not. Both sides have already won some victories in lower federal courts, including a ruling for the employees (participants in 401(k) speak) in the Edison plan regarding several retail mutual funds added to the Edison plan more recently. A six-year statute of limitations applies to the case, so when the plaintiff's attorneys attacked Edison over adding retail funds less than six years before the case was filed when institutional shares of the same funds were available, the plaintiffs won.

Yet the lower courts tossed the same claim with respect to the funds added in 1999, saying they fell outside the statute of limitations. The plaintiffs think the statute should be looking back not to the initial selection date but to each time that Edison did its regular due diligence and decided to keep the retail funds instead of switching them out for institutional shares. Edison does quarterly due diligence reviews of the plan's investment lineup, so by this limit the statute of limitations would only trigger more than six years after a fund in question had been removed from the plan.

The Supremes will rule on the case before their summer break begins in late June. In the meantime, multiple publications interpreted some justices' remarks on Tuesday to mean that they're leaning towards the participants' side of things. Yet the justices did have lots of questions for both sides. Whatever the justices do, the case does put a spotlight (and not a good one) on the use of retail mutual funds in very large 401(k) plans, and the plaintiffs already won their claims involving the more recently added funds.

To dig deeper into Tibble v. Edison, read 401kWire's timeline of the case prior to reaching the Supreme Court. 

Edited by: Neil Anderson, Managing Editor

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