Compliance January 5, 2015

District Court Moves Forward Boeing Fee Case

A federal district court has denied Boeing’s request for summary judgment on the merits of Spano vs. The Boeing Company, a long-running excessive 401(k) fee case.
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The U.S. District Court for the Southern District of Illinois moved on three motions pending in Spano vs. The Boeing Company, a case about excessive 401(k) plan fees involving nearly 200,000 retirement plan participants.

Besides denying Boeing’s request for summary judgment on the merits of the case, the court also granted in part and denied in part Boeing’s motion for summary judgment based on ERISA’s six-year statute of repose. The court also denied plaintiffs’ motion to strike certain reply briefs filed by Boeing—moving the case one step closer to resolution.

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The case has a complicated procedural background—arising nearly a decade ago as part of the first wave of defined contribution plan fee litigation. At the heart of the case is a familiar challenge: plaintiffs allege that Boeing plan fiduciaries failed to adequately monitor and disclose fees assessed against participants’ 401(k) accounts, while simultaneously spending more than necessary on plan investments and services. The workers alleged that the excessive fees were imposed on the plan through a combination of both hard dollar payments and hidden revenue-sharing transfers.  

The case has already resulted in a series of important rulings, following initial class action certification in 2008. A subsequent appeals court ruling from Circuit Judge Diane Wood, writing for a three-judge panel on the 7th U.S. Circuit Court of Appeals, confirmed that situations in which a retirement plan as a whole is injured at the same time as an individual employee can arise when the entity responsible for investing the plan’s assets charges fees that are too high or when the plan has been reckless in its selection of investment options for participants—and thus that class action suits can be leveled against employers in such circumstances.

According to the text of the Illinois district court’s latest ruling, Boeing’s motion for summary judgment based on ERISA’s six-year statute of repose was granted in part and denied in part. As noted in case documents, it is undisputed that each of the four investment funds through which participants allegedly paid excessive fees were initially included as part of the plan in or before 1997, when the plan was amended to make a greater number of investment options available to participants. Plaintiffs assert, however, that fiduciary breaches relating to each of these funds (and the plan’s administration more generally) occurred throughout the six years preceding the filing of this case on September 28, 2006, as well as further back to 1997.

While there is some conflict among circuit courts on the point, the Illinois district court says it is to rely on precedent set by the 7th U.S. Circuit Court of Appeals, which has held ERISA fiduciaries to the same duty of prudence after initial selection as before. 

The current ruling points to Martin v. Consultants & Administrators, Inc. (7th Cir. 1992), which established that a plan fiduciary can be held liable on a repeated basis after the initial decision to offer an imprudent investment, on the theory that each day in which a fiduciary fails to remove an imprudent investment, a new breach is born. The court noted in Martin the “continuing nature of a trustee’s duty under ERISA to review plan investments and eliminate imprudent ones.” In this respect, Boeing’s questions on ERISA’s limitations period resemble those of defendants in another widely followed 401(k) fee case that has made it all the way to the U.S. Supreme Court and is mentioned in the text of the current decision—Tibble vs. Edison International—set for argument in late February.

The text of the current decision shows that some of the plaintiffs’ claims are to be time-barred under ERISA, while others “do not merely contest actions and omissions occurring prior to September 28, 2000 ... For each of the five claims, Plaintiffs have identified actions and/or omissions that—after September 28, 2000—constitute distinct breaches of fiduciary duties. For example, Plaintiffs assert that, during the six years before they filed suit, defendants failed to solicit competitive bids for plan administrative services to ensure that Plan administrative fees were reasonable.”

The denial of plaintiffs’ motion to strike certain Boeing reply briefs is explained this way: “Given the fact that the undersigned District Judge received this case from the docket … at this late stage in the litigation, the undersigned District Judge finds the reply briefs to be helpful. For these reasons, the Court denies Plaintiffs’ Motion to Strike Defendants’ Reply Briefs.” As noted in the ruling, district court procedures stipulate that reply briefs “should be filed only in exceptional circumstances.” The district court judge who first presided over the case has since retired and died, case documents show.

The Illinois district court also determined that Boeing’s motion for summary judgment on the merits of Spano vs. The Boeing Company cannot be granted, because there are a number of outstanding factual disputes to be decided during the course of trial.

The full text of the Illinois district court decision is here.

Compliance January 2, 2015

Supreme Court Sets Date for Tibble Arguments

The United States Supreme Court will hear arguments in the closely watched 401(k) fee litigation case Tibble v. Edison near the end of February.
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An updated docket sheet on the U.S. Supreme Court website showsTibble v. Edison will be argued on February 25, 2015.

The case is considered by industry observers to be the first “excessive fee” litigation to reach the country’s top court. In a 2014 interview with PLANSPONSOR, the plaintiffs’ attorney in the case said Tibble v. Edison is tremendously important for the future of the retirement planning industry.

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“The question before the Supreme Court is whether plan sponsors can get permanent immunity on an imprudent investment decision, for all time, based on the limitations period [in ERISA],” says Jerry Schlichter, of the law firm Schlichter Bogard and Denton, who will argue for plaintiffs in the class action. “The lower courts have decided that, even if a plan has been shown to include a fund that is known to be imprudent, as is the case here, it can be protected from liability by the ERISA six-year limitations period. That’s the question the court has to decide whether to overturn—whether it’s appropriate to give sponsors permanent immunity from liability once the investment that is being challenged has been on the plan menu for six years.”

According to the Supreme Court’s website, justices will limit their review of Tibble to the following question: “Whether a claim that ERISA [Employee Retirement Income Security Act] plan fiduciaries breached their duty of prudence by offering higher-cost retail-class mutual funds to plan participants, even though identical lower-cost institution-class mutual funds were available, is barred by 29 U. S. C. §1113(1) when fiduciaries initially chose the higher-cost mutual funds as plan investments more than six years before the claim was filed.”

As part of that question, the Supreme Court must also decide if the so-called “Firestone deference” (as established in the high court’s 1989 decision in Firestone Tire & Rubber Co. v. Bruch) applies to fiduciary breach actions under 29 U.S.C. §1132(a)(2), where the fiduciary allegedly violated the terms of the governing plan document in a manner that favors the financial interests of the plan sponsor at the expense of plan participants.

During a recent conference call, one ERISA specialist said the real issue at hand in Tibble v. Edison has less to do with the strength or weakness of the ERISA limitations period than many in industry and media have suggested. As Fred Reish, an attorney with Drink Biddle & Reath and leader of the firm’s ERISA practice, explains, “the true issue before the Supreme Court is whether there is a discreet and ongoing duty to monitor investments that is distinct from the initial duty to select.” 

“The trial court and the 9th Circuit, consistent with other appeals courts, ruled that once the six-year window has gone by from when an investment was selected, there is no continuing duty to monitor,” Reish explains. “As the decision stands, the duty to monitor doesn’t start that limitation period again each year, it doesn’t keep rolling that way. So once six years go by from the initial fund selection, the fiduciaries are safe from plaintiffs seeking damages.

“If this goes if favor of the defendants it will eliminate or substantially reduce the ongoing duty to monitor,” Reish notes. “In this sense, again, the question before the Supreme Court is not really a statute of limitations question, as some have interpreted. The real question is whether there is an independent duty to monitor that has its own six-year statute of limitations, such that every year the failure to monitor starts a new limitation period, and the sponsor can then be sued on at any point in the next six years once a failure to monitor has occurred.”

Reish urges both the plan sponsor and adviser communities to “watch this very carefully, because it could diminish the perceived value of advisers if the Supreme Court says there is no legal separation between the ‘ongoing duty to monitor’ and the original decision to select.”

Additional coverage of Tibble v. Edison, including more background and interpretation from industry experts, is here.

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