The
Michigan Supreme Court has ruled that pension changes made in 2012 are constitutional. The reforms require school employees to elect either to
contribute 3% of salary to pre-fund health care benefits or forego retiree health
care in lieu of a 2% matching contribution into the state’s defined
contribution plan.
Specifically,
the court said the state “is not obligated to provide publicly subsidized
health care to public school employees, but has affirmatively chosen to do so,
and it is therefore entirely reasonable to request that any eligible employee
who desires the benefit help pay for it.” The court found the pension reform does
not take private property in violation of the Takings Clauses of the state
constitution.
In addition, the
court decided the changes do not attach an unconstitutional condition to the
receipt of a governmental benefit and do not impair any employment contracts. Instead,
the changes “afford public school employees the option to choose between two
potential retirement benefits, and the underlying employment contracts are unaffected,”
the court said in its opinion.
Despite
enormous industry attention paid to the case, some attorneys say a pending Supreme Court decision in the Tibble vs. Edison retirement plan fee litigation may not
be so impactful after all.
A recent fiduciary education webcast hosted by Nancy Ross, partner
in Mayer Brown’s litigation and dispute resolution practice, and Brian Netter, partner
in the firm’s Supreme Court and appellate practice, made the case that the retirement
plan industry won’t be reshaped in a meaningful way by the final resolution of Tibble vs. Edison.
This is partly because Mayer Brown anticipates a narrowly
constructed decision from the Supreme Court—given the technical and convoluted
path the litigation followed to reach the top court—and partly because many plan
sponsors have already moved away from the behaviors that got utility company
Edison International in trouble with its 401(k) plan participants in the first
place.
The 401(k) fee litigation has climbed about as high as a
legal dispute can in the United States—getting a day of argumentation before the U.S. Supreme Court back in February. A review of argument transcripts
in Tibble v. Edison shows Supreme Court justices had an
extensive amount of questions for both the appellants and appellees—many of
which strayed far beyond the narrow review to which the Supreme Court initially said it would limit itself.
As explained by Ross and Netter, the Supreme Court said it
would focus only on timing and limitation issues stemming from complaints filed under the Employee
Retirement Income Security Act (ERISA). But when Tibble was actually probed by the SCOTUS justices, their inquiries waded
deeply and widely into the nature of the fiduciary duty and its fundamental relationship
with trust and contract law.
This caused some in the retirement industry to ask whether the
Tibble vs. Edison decision could
redefine or fundamentally alter important aspects of the fiduciary duty
prescribed by ERISA—an outcome that is still certainly possible, given that the
case hasn’t been finally decided. During their questioning, the justices even went
so far as to probe the legal and practical difference between the “duty to
select” and the “duty to monitor” investment options placed in an ERISA plan—concepts
that today remain somewhat squishy under ERISA and are constantly being tested
in lower courts, Netter and Ross observe.
“Something that is critical to note about the way Tibble is playing out is that, when the
Supreme Court briefs were filed, it became clear that everyone agrees already that
ERISA’s six-year limitations period does in fact bar a claim that is more than
six years old,” Netter explains. “Where there is disagreement is around the
nature of the underlying fiduciary duty and whether there is a truly distinct
duty to monitor, such that it has a distinct rolling limitations period.”
Ross and Netter feel its “highly unusual” for the Supreme Court
to agree to hear one question, and then for the parties to decide in their briefs
that they have already settled the question, and that they, the parties, want
the court’s input on another question entirely.
“In a sense that is exactly what has happened with Tibble v. Edison,” Netter concludes.
Netter and Ross went on to suggest it’s likely the Supreme Court
will take a narrow approach and “leave open as many questions as it answers”
coming out of Tibble. In short, the
pair does not expect a ruling that will firmly codify the difference between
the duty to select and the duty to monitor investments, nor do they expect a
major change to the way ERISA’s six-year period of repose is interpreted—whether
or not the Supreme Court decides participants were wronged in this case.
Netter and Ross are quick to qualify the point, however, and
to encourage plan sponsors to consider what Tibble
means for them: “The way the case has progressed to reach the Supreme Court,
and the way justices reacted during the argument phase, it seems likely to us
that companies that are responsibly trying to manage their risk under ERISA should
long ago have taken actions to ensure they are satisfying certain standards that
are being highlighted by the ongoing case,” Netter explains.
The pair notes that the final Tibble decision may hinge on timing issues, but the initial
complaints stem from something entirely different—the inclusion of retail
share classes on a 401(k) plan investment menu when cheaper share classes were
available. However the questions of timing and monitoring turn out in this
specific case, even the lower courts were clear that a prudent sponsor would have taken action to get the lower-priced share class. In the lower courts' decisions, Edison International was protected from certain liabilities because plaintiffs apparently waited too long to file a complaint—not because Edison Internal successfully defended its decisionmaking.
Another ERISA expert, Mark Blocker, an attorney and partner at Sidley Austin
LLP, agrees with that assessment. He also tells PLANSPONSOR he doesn’t believe the decision in this case will
open the floodgates to new lawsuits of this nature, as some have predicted, because most plan sponsors have already adjusted their approach to building a plan investment menu.
“In my experience, most fiduciaries review their plan
investments quarterly in accordance with widely accepted industry practices
designed with ERISA compliance firmly in mind,” he notes. “My estimation is
that the court’s decision remains unclear in this case. Both parties agreed
there is an ongoing duty to monitor but disagree whether the Ninth Circuit
opinion can be squared with that duty.”
Blocker says the interesting parts of the Tibble outcome will have more
implications for legal scholars than retirement plan industry practitioners. Like Ross and Netter, he feels the Supreme Count isn’t necessarily
equipped to make a broad ruling in a case like this, “which has shifted and
morphed so much on its way through the appeals process, to really firmly pin
down the contours of where the fiduciary duty stands today would be extremely challenging.”
“Will they need to remand the case back to the lower courts
or will they offer an interpretation of the statute of limitations in ERISA as
it related to the duty to monitor?” he asks. “We just don’t know yet.”