The scope of a plan fiduciary's liability in a participant-directed retirement plan under ERISA is broader than some may have been aware. The US Court of Appeals for the Ninth Circuit's recent decision in Tibble v. Edison, International, highlights the potential scope of a fiduciary's liability, particularly regarding a plan fiduciary's responsibility to prudently select investment funds for the plan. In determining which funds to include in a plan, a plan fiduciary:

Current and former employees of Edison International's 401(k) plan sued under ERISA, claiming the plan had been managed imprudently. On behalf of a class representing all of Edison's eligible workforce, the plaintiffs claimed:

The district court granted summary judgment to Edison on most claims. However, although the court decided at summary judgment that retail mutual funds were not categorically imprudent, it agreed with the plaintiffs that Edison had been imprudent in failing to investigate the possibility of institutional-class alternatives. The plaintiffs appealed the district court's partial grant of summary judgment to Edison, and Edison cross-appealed the post-trial judgment.

On March 21, 2013, the Ninth Circuit issued an opinion, holding that:

For a detailed review of the Tibble decision, see Legal Update, Ninth Circuit Joins Circuit Splits in ERISA Section 404(c) Opinion and Defers to DOL Interpretation of Safe Harbor.

Under Section 404(c), a fiduciary's liability for investment losses is limited if plan participants can control the investment of their accounts (see ERISA Section 404(c) Checklist). The DOL has always interpreted its regulations under ERISA Section 404(c) to provide that this safe harbor from fiduciary liability does not protect a plan fiduciary's selection of investment funds for the plan. In 2010, the DOL amended its regulations to clarify this interpretation, so that the rule appears within the Federal Register, rather than in the preamble to the regulations (29 C.F.R. § 2550.404c-1(d)(iv)).

In Tibble v. Edison International, the Ninth Circuit, interpreting the ERISA Section 404(c) regulation before the effective date of the DOL's amendment:

(No. 10-56406 (9th Cir. Mar. 21, 2013).)

Under ERISA Section 404(c), the breach or loss must be the direct and necessary result of a beneficiary's action for the fiduciary to be insulated from liability. Since the fiduciary is responsible for selecting the funds to include in the plan, it logically precedes and therefore cannot result from a participant's decision to invest in any of those options.

Plan fiduciaries should engage in a careful and prudent process when selecting investment funds for ERISA-governed retirement plans and should be aware that no safe harbor protects them from liability for these decisions. For more information on the scope of the safe harbor from fiduciary liability under ERISA Section 404(c), see ERISA Section 404(c) Checklist.

One of the main holdings in Tibble was that the plan fiduciary's selection of retail-class mutual funds, rather than institutional-class mutual funds, was not categorically imprudent, but was imprudent in this particular case. This was because the plan fiduciaries failed to investigate the possibility of similar, institutional-share class alternatives with significantly lower expense ratios that were demonstrably available to the plan. In particular, the Ninth Circuit noted all three funds offered institutional options in which the plan could have participated. Those options were between 24 to 40 basis points cheaper than the retail class options the plan included and there were no salient differences in the investment quality or management between the class profiles.

Edison argued that it reasonably relied on its fiduciary service provider, Hewitt Financial Services (HFS) for advice on which mutual fund share classes to select for the plan. However, the trial evidence showed that while an experienced investor would have reviewed all available share classes and the relative costs of each before selecting a mutual fund, Edison had neither:

Rather, under the standards imposed in the US Court of Appeals for the Second and Ninth Circuits, a fiduciary is required to:

Ultimately, the Ninth Circuit agreed with the district court that, given the trial evidence described above, Edison had not demonstrated that its reliance on HFS's advice was reasonably justified under the circumstances.

This conclusion is an important reminder that plan fiduciaries are ultimately responsible for the selection of investments in the plan and may not simply point to a service provider's advice to eschew this responsibility. In addition, plan fiduciaries are responsible for the prudent selection and monitoring of all plan service providers, including investment consultants (see Practice Note, Negotiating ERISA Service Provider Agreements: Selecting a Service Provider and Monitoring the Service Provider).