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Does Pending Appeal Decision Doom 401k Plan Sponsors?

June 14
00:02 2011

Like a Damocles Sword, the decision of the U.S. Ninth Circuit Court of Appeals looms precariously over 401k plan sponsors. It could what the DOL, promoters of the fiduciary standard and far sighted industry experts have long failed to accomplish – 12547_3176_king_jagiello_statue_stock_xchng_royalty_free_300get 401k plan sponsors to recognize, and even fear, their increasing fiduciary liability. Here’s a case, if the Appeals Court agrees with the ruling already handed down by a lower court, that could force HR, C-Level executives and any other ERISA fiduciary to reconsider whether they want to remain in their positions.

Yet, for some strange reason, it’s not getting a lot of attention. Ironically, nearly a half million dollars of damages were awarded because plan fiduciaries failed to pay attention to “fee creep.”

Last summer in a case called Tibble v. Edison, a federal district court judge slapped a $371K judgment against Edison International, (the parent company of Southern Edison Electric), its various investment and oversight committees as well as certain named fiduciaries of the Edison 401k Savings Plan. Their crime: they invested plan assets in a class of a mutual fund when lower fee classes where available in the same fund. This is the equivalent to paying full retail price at the story when you have a 20% discount coupon sitting in your pocket collecting dust.

If you fail to pay the cheapest price at the store, the worst that could happen is your spouse might get on your case. If you fail to pay the cheapest price as a fiduciary to a 401k plan, the worst that could happen is your employees might have a viable case. And let’s not forget the DOL, too. “The DOL recently submitted a brief in support of the lower court decision,” said Bob Lowe, an ERISA attorney at Mitchell Silberberg & Knupp LLP in Los Angeles. In May, Lowe was nominated as a “Top ERISA attorney” by readers of Fiduciary News.

What is “fee creep” and how does it occur? When a plan is small (or, in the case of Edison, old), it is often limited to buying only higher fee classes of mutual funds. Over time, fund companies have introduced more classes with different fee arrangements. Sometimes, those fee arrangements might be considerably lower than the fee arrangement of the original or retail class. The trouble is, to qualify for these lower fee arrangements, the investor must be an institution with a minimum number of assets. It’s important to remember, we aren’t comparing apples-to-oranges here, as usually happens when the discussion turns to mutual fund fees. This is a true apples-to-apples comparison since the different classes represent the same portfolio in a single mutual fund.

As a plan grows, its assets grow and it can often then qualify for lower fee share classes… but only if somebody asks. This is where the fiduciaries in charge of the Edison 401k Plan made their mistake. By not paying attention, the plan paid more in fees then it needed to. What’s critical in this case is the plaintiff – and the court agreed – did not fault Edison for its initial decision to purchase what ultimately because a high cost class of shares. In the specific case of Edison, the plan sponsor failed to keep abreast of changes in the mutual fund industry in general and, specifically, in the range of classes offered for the particular mutual funds the plan invested in. The fee creep occurred because as the plan grew and the fiduciaries did not take advantage of lower cost share classes, the fees grew much faster than necessary. This is the fiduciary liability the court ruled on in its 82-page opinion.

Since “this issue affects all plans, large and small, that offer mutual fund investment options,” Lowe recommends plan sponsors consider the matter even before the Appeals Court takes action. “One of the issues I am currently working with clients on is making sure they are aware of the different share classes offered by many mutual funds,” he says.  “Many plans are in more expensive share classes than they need to be which can result in fiduciary claims.  Often as plan assets grow, plans become eligible for lower cost share classes but plan fiduciaries are not aware of it because they haven’t asked about it.”

The sword swings ever closer. Will 401k plan sponsors heed the warnings before it’s too late?

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. TEX MEX
    TEX MEX June 14, 10:23

    This article, specifically when it discusses the opportunity to pay lower fees as the plan asset trust size grows, is incorrect. It is correct that “one has to ask” for such lower charges regardless of the size of the assets in trust. Lower expense ratio mutual funds and no-load funds are available no matter how small a K Plan might be.

    All this merely reinforces the rank disregard for the interests of the plan participants by the Pension Establishment. It will take Tribble and other cases of large size to knock the Pension Barons in the head before they start to act like reasonable human beings. Hoorah, for the federal district court in California who helped put these crooked jerks in their proper light.

  2. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author June 21, 01:11


    Thanks for your comment. We strive for accuracy, so I want to make sure I give you the opportunity to clarify your point.

    Is this true for all mutual fund families or just certain mutual fund families? It is my understanding based on speaking with others that certain fund families have an institutional class for at least some of their funds and that there is a specified minimum amount that is required to be invested before a plan can buy those shares.

    For example, Vanguard requires a minimum of $5 million in order to access its institutional shares. (see

    Let me know if I’m misunderstanding.



  3. george w
    george w June 24, 16:23

    I believe some clarity might help. The code does not state the “lowest price fund must be used” but does say the price must be in line with the services provided. Many funds have minimums for different share classes and as asset size grows other share classes can be accessed. This is common practice if C shares are used to start the plan. Once plan assets grow above 500k the C shares are automatically changed to R shares. In this case it appears there wasn’t any increase in services provided as the asset size grew. A competent consultant would have prevented this problem, however, many companies feel handling these responsibilities in house saves money. This allows the mutual fund company to continue to take higher fees while having no fiduciary standing.

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