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Rating:Retail Mutual Funds In a Big 401k? A Federal Court Smites Not Rated 0.0 Email Routing List Email & Route  Print Print
Friday, August 18, 2017

Retail Mutual Funds In a Big 401k? A Federal Court Smites

News summary by MFWire's editors

The use of retail mutual fund shares inside of 401(k) plans was just dealt another blow this week thanks to a high-profile federal class-action lawsuit.
Jerome Schlichter
Schlichter Bogard & Denton
Senior Partner & Founding Partner


Edison International breached its fiduciary duty to employees (participants, in 401(k) parlance) by using 17 retail mutual funds (instead of institutional share classes) inside its company 401(k) plan, U.S. District Judge Stephen Wilson in the Central District of California ruled on Wednesday, ten years to the day after the case was first filed. For the small number of big asset managers who dominate the 401(k) plan business (both bundled and DC I-O), the ruling probably fans the flames of an already-ongoing 401(k) shift away from retail mutual funds and towards institutional mutual funds, separate accounts, collective funds, and other non-retail investment products, especially in big 401(k) plans. For smaller asset managers intent on getting into the 401(k) space as DC I-Os themselves, the ruling highlights the importance of having institutional share classes.

Our sister publication, 401kWire, digs into the judge's latest ruling. Bloomberg, Pensions & Investments, and PlanSponsor also covered the news.

The case is not over yet, though, as the judge now has to rule on damages. The two sides now have 20 days (i.e. until September 5) to present a unified (or conflicting) perspective on damages to the judge. And here fundsters may take comfort in how the judge wants the damages calculations done. Jerry Schlichter, the infamous 401(k) fee lawsuit attorney, pushed for damages to be calculated by comparing the 17 retail funds' performance to that of an S&P 500-tracking index fund, yet the judge ruled that the better comparison is to the 401(k) plan's overall performance (across all the different investment products offered within, of which the 17 funds in question were only a small portion). (The parties have agreed on damages of about $7.5 million for the period from 2001 to 2011, so the remaining damages calculation question surrounds the period from 2011 to the present day.)

"The funds in question have not been part of the offerings for employees since 2011 and the litigation has not raised any questions regarding the appropriateness of the current portfolio of funds," an Edison spokesman tells Bloomberg. "Edison International and Southern California Edison [a subsidiary of Edison International] understand the importance of their 401(k) plan to employees' retirement goals ... We have consistently provided a wide array of high-quality investment options in the 401(k) plan."

Schlichter himself, who represents the plaintiffs in the suit and is founding and managing partner of St. Louis, Missouri-based Schlichter, Bogard & Denton, states that he's "pleased that the court agreed with our position."

The lawsuit, Tibble v. Edison International, was first filed against Rosemead, California-based Edison on August 16, 2007, and it was certified as a class-action in 2009. O Melveny and Myers represents Edison in the case.

In 2015 the case rose all the way to the U.S. Supreme Court, which unanimously ruled that employers' (plan sponsors, to use 401(k) lingo) fiduciary duty to monitor 401(k) plan investments is ongoing, not once and done, for the purposes of the six-year statute of limitations on questions of retirement and benefits law (under ERISA). That ruling pushed the case back down to the lower courts. Now, 10 years after it started, the case appears to be close to the finish line. 

Edited by: Neil Anderson, Managing Editor


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