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The Fiduciary Corner: The Duty to Ask for a Better Deal

When is it appropriate to accept the sticker price listed on a product without asking the salesman for a better deal?  Maybe never, at least if you’re a fiduciary of a $2 billion 401(k) plan spending the participants’ money, according to a federal court in California.  (Tibble v. Edison International, 7/8/2010).  That’s true even if an independent consultant advises you to buy the higher-priced product.

The Tibble case was one of many similar lawsuits filed in 2006 and 2007 that challenged 401(k) plan investment options as too expensive.  According to plan participants and their attorneys, plan fiduciaries breached their duties under ERISA when they failed to negotiate for lower-cost options.  Tibble is the first of those fee cases to go to trial for which a decision has been reached.  (A court in Kansas City continues to deliberate over a case involving ABB Company and Fidelity, which was tried earlier this year.)

In Tibble, the participants alleged that the fiduciaries selected retail share classes — rather than less expensive institutional share classes — of three mutual funds made available to participants in the Edison International Plan.  The retail share classes of these funds charged fees that were 25 to 40 basis points higher than the fees charged for the otherwise-identical institutional share classes.

Defending their failure to offer the cheaper share classes, the plan’s fiduciaries argued that the plan had insufficient assets invested in the funds to qualify for the cheaper institutional share classes.  The court was not persuaded.  In one instance, the plan satisfied the minimum investment threshold only one month after the fund was first offered, but the fiduciaries never asked the fund provider to make the lower-cost share class available.

The court was even more troubled by the fact that the fiduciaries never even asked the fund providers to waive the minimum investment requirements.  The fiduciaries’ own expert witness testified that such waivers are routinely granted, even for plans with just a fraction of the bargaining power of the Edison Plan.  This failure to ask for a waiver amounted to a breach of fiduciary duty under ERISA.

The court was equally unimpressed with the fiduciaries’ argument that they relied on the advice of an independent consultant when selecting fund options.  Although securing the advice of a consultant “is some evidence of a thorough investigation, it is not a complete defense to a charge of imprudence.”

In the end, the court agreed with the plan participants, finding the fiduciaries personally liable for the extra expenses associated with the higher-cost funds.

The lesson:  Fiduciaries of any plan — whether it has $2 billion or $2 million in assets — have a duty under ERISA to be actively engaged in the process of selecting investment options.  At a minimum, fiduciaries should ask whether lower-cost share classes are available, even if their consultant doesn’t.  If a less expensive share class is available, fiduciaries should ask the fund company to waive any minimum investment threshold that would otherwise prevent the plan from offering that share class.