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Plan Fiduciaries Need to Evaluate Carefully the Fees

Charged by Investment Funds Made Available Under


Their Retirement Plans
Thomas M. White
A R NS TEI N & LE HR LLP
120 S O UTH R I V E RS I DE P LA ZA | S UITE 1200
C H I C A G O , I L 6 06 06
P 3 12 . 8 76 . 7 18 4 | F 3 12 . 8 76 . 02 8 8
tmwhite@arnstein.com

Many retirement plans permit participants to allocate investments in their plan accounts from
a list of investment funds chosen by a plan fiduciary. Under ERISA, plan fiduciaries may
reduce their legal obligations if participants have investment discretion over their accounts.
However, fiduciaries who select a group of investment funds for participants retain the
fiduciary obligation to determine that the investment “menu” is appropriate under ERISA’s
fiduciary standards. A recent court decision, (Tibble v. Edison Int’l. (C.D.Cal., July 8, 2010)),
demonstrates that plan fiduciaries: (1) must select those investment choices after careful
analysis of the funds under review and other similar funds; (2) should engage outside experts
to assist in the analysis where appropriate; (3) should review carefully the recommendations
of any retained outside professionals; and (4) should document in writing the reasons for their
fund selections.

Edison maintained a retirement plan which permitted participants to select how their
accounts would be invested. An administrative committee devised a list of available
investment funds and the investment returns were diminished by the fees charged by each
fund’s manager. In several instances the investment selection committee selected retail class
shares rather than institutional shares. The shares had identical investment characteristics
but the retail shares charged higher fees. The court held that this was a breach of ERISA’s
fiduciary duty of prudence since the plan did not receive any additional benefit when it
acquired the higher-cost retail investment funds.

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There were several defenses raised and two are of particular note. It was contended that the
investment committee had retained an outside advisor to assist in the investment selection
process and the committee relied on the expertise of the advisor. The court found this
defense inadequate for two reasons. First, there was no record of the analysis done or
recommendations made by the advisor. And second, even if there had been a report, every
expert’s report must be subject to an independent analysis and review by the appropriate
plan fiduciaries. Advisor recommendations must be rejected where they are unsupported by
the facts. In this case the court believed that there was no justification for choosing an
investment fund that charged a higher fee then another fund with identical investment
characteristics.

The plan fiduciaries also contended that the lower-cost institutional shares would not have
been available to Edison’s plan because the funds required investment minimums in excess of
those that the plan would have made. The court stated that the failure to request a waiver of
the minimum investment was a breach of duty because the investment manager would have
waived this requirement in order to have obtained the plan as a client.

The issue of plan investment fees has been the subject of substantial litigation and review by
relevant government agencies. Plan fiduciaries responsible for investment decisions,
including the selection of a plan’s investment menu, should assure that their decision making
process is thorough and based on serving the best interests of the plan participants and
beneficiaries. This fiduciary duty must be satisfied at the initial investment stage and
thereafter, when investments are periodically reviewed. If there are investment issues that
the plan fiduciary does not have the expertise to evaluate, then outside expertise is required.
Any experts’ reports should be reviewed and subjected to careful scrutiny. All steps of the
investment selection and review process should be documented in writing and written
records should be retained in order to preserve appropriate defenses to any audit or
litigation.