By: David I Gensler, MSPA, MAAA, EA
A lawsuit that began in 2011 is finally approaching its conclusion. The plaintiffs claimed that the 17 investment options selected by the plan back in March of 1999 were retail funds instead of lower cost institutional shares. The funds remained in the plan beyond August 16, 2001. That date is particularly relevant since that is as far back as the statute of limitations could go.
The case went all the way to the Supreme Court. While the Supreme Court found neither for the plaintiff nor for the defendant, (the case was remanded back to the District Court for the Central District of California) they did provide critical guidance to the lower court. In its opinion, the Supreme Court found that the defendant (the plan sponsor) had “an ongoing duty to monitor the plan investments.” Last month, having found that a prudent fiduciary would have invested in institutional class versus retail class shares and relying on guidance from the Supreme Court (the “ongoing duty” standard), Judge Stephen Wilson held that the defendants were indeed liable for breaching their fiduciary duty from August 16, 2001 through January of 2011, when the lawsuit began. He found that the plaintiffs had appropriately calculated the damages up until January 2011 by determining the profits the plan would have accrued if it invested in institutional shares classes instead of retail share classes. The damages came to $7.5M.
But what about the period from January 2011 to the present? Judge Wilson found that additional damages from January of 2011 to the present time needed to paid. Having long ago removed the retail class mutual funds from the plan, the question now was centered around the methodology that should be used to calculate these additional damages. Judge Wilson concluded that the plan’s overall returns – including the brokerage window- would be used to calculate the damages. He then directed the parties to come to an agreement as to that total.
That has now been done. Both parties were willing to stipulate that the through July of 2017, the overall plan losses were $13.1M. So if the court accepts the joint stipulation Edison will be directed to pay an additional $5.6M to a class of current and former employees.
However, we are still not quite done. The plaintiff’s attorneys, Schlicter Bogard and Denton will file a motion seeking fees and costs. I would have thought that their fees would have been part of the settlement but apparently not.
To me, there are a few important takeaways:
- a) Plan fiduciaries have “an ongoing duty to monitor the plan investments.” The Supreme Court made that clear.
- b) The plaintiffs’ attorneys that pursue such lawsuits continue to “follow the money.” Edison’s plan had $2.3B in it. The plan needs to have a large enough critical mass of plan assets to warrant such a lawsuit in the first place.
Even if your plan has nowhere near that amount of assets, following a few simple procedures (monitoring the funds in the plan for performance and expenses, forming an investment committee, keeping formal minutes of the meeting, making sure that the recordkeeping fees are in line) will have your plan on solid ground.