On March 21, 2013, the U.S. Court of Appeals for the Ninth Circuit issued its decision in Tibble v. Edison International, one of the most closely watched decisions in the ERISA litigation world during the past several years. The trial court decided most of the issues in Tibble in favor of the defendants and the Court of Appeals has now affirmed all of the District Court's decisions with regard to those issues – although not always for the reasons articulated by the District Court.
In this article, we address just one of the significant aspects of Tibble: the issue of revenue sharing and how plan sponsors and fiduciaries should deal with it.
From 1997 until December 2006, the Edison 401(k) Plan stated that "[t]he cost of administration of the Plan will be paid by the Company." Beginning in 1999, the menu of investment options was expanded in the Plan in response to collective bargaining negotiations with the union representing many of the Edison employees. Some of the mutual funds that were added as investment options transferred a portion of their fees to the Plan's administrative service provider, Hewitt. In turn, Edison received a credit on its bills from Hewitt. Thus, the "revenue sharing" payments reduced the amount that Edison would otherwise have had to pay to Hewitt. The revenue sharing arrangement was disclosed by Edison in connection with collective bargaining negotiations and in the Plan SPDs. In December 2006, the Plan language was formally amended – consistent with how the Plan fiduciaries were already interpreting the Plan – to provide that "[t]he costs of administration of the Plan, net of any adjustments by service providers, will be paid by the Company."
The Plaintiffs claimed that Edison violated the Plan prior to its amendment because it benefited from the revenue sharing payments. Edison argued that the pre-2006 Plan language did not foreclose revenue sharing, that the Plan conferred "full discretion to construe and interpret [its] terms and provisions" upon the Plan fiduciaries, and that the fiduciaries had always interpreted the Plan to mean that Edison would pay the invoices that Hewitt submitted – after Hewitt applied the revenue sharing payments.
Edison argued that the court should defer to the Plan fiduciaries' interpretation of the Plan unless that interpretation was arbitrary or capricious.
The Court of Appeals concluded that the fiduciaries' interpretations of the Plan were entitled to deference since the Plan gave them discretion to interpret its terms.
In applying the abuse of discretion standard, the Tibble court relied heavily on evidence showing that revenue sharing was not hidden from participants, was expressly discussed between Edison and union negotiators, and was referred to in SPDs.
Plaintiffs in Tibble also argued that it was a prohibited transaction for Edison to receive the "benefit" of lower administrative costs as a result of revenue sharing. The argument was based on ERISA§406(b)(3), which provides: "A fiduciary with respect to a plan shall not receive any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan." In a somewhat controversial decision, the trial court viewed Edison not as a unified corporate entity, but in terms of its constituent parts and decided that since the fiduciary that selected the mutual funds that provided the revenue sharing was different than the fiduciary that received the benefit of the revenue sharing, no prohibited transaction occurred. This aspect of the trial court's decision was, and remains, controversial for the obvious reason that both fiduciaries were affiliated with Edison, albeit with different constituent parts.
The Ninth Circuit declined to adopt the trial court's reasoning, but nevertheless upheld the decision in favor of Edison on different grounds. Relying on a DOL regulation and advisory opinion that allows fiduciaries to be reimbursed for out-of-pocket expenses they incur, the court concluded that discounts on Hewitt's invoices constituted "reimbursement" rather than "consideration." Therefore, applying those revenue sharing payments to the administrative expenses did not violate §406(b)(3).
Although Edison prevailed with respect to the revenue sharing issues, there are still lessons to be learned from the case, and about revenue sharing in general.
First, plan fiduciaries need to understand how revenue sharing works. The DOL's 408b-2 regulation now requires service providers to disclose all of their direct and indirect compensation in writing, and fiduciaries are obligated to make sure they have received disclosures from all of their service providers – and to demand that service providers who fail to disclose do so. Failing to take the required action violates the regulation and may trigger a prohibited transaction. In short, prudent fiduciaries will take steps to know who is paying compensation (including revenue sharing), how much is being paid, and who is receiving the payment. Then, fiduciaries must determine if the total compensation is reasonable.
Second, it may be risky for a plan sponsor or fiduciary to rely on the Tibble trial court's decision that there was sufficient distinction between the fiduciary making the investment decision and the fiduciary benefitting from the revenue sharing. The DOL vigorously objected to the lower court's conclusion in that regard, arguing that 406(b)(3) is intended to prohibit transactions where fiduciaries make plan investment decisions that result in the company receiving an economic benefit from a third party. The Ninth Circuit did not embrace the district court's analysis, stating: "we reserve for another case whether the lower court's control determinations are defensible..." Thus, it is likely safer for plan fiduciaries to assume that committees that they appoint to oversee plan investments may be treated collectively, as an extension of the plan sponsor itself.
Third, it matters what the plan says about who, as between the plan and the sponsor, is responsible for paying the plan's administrative costs. Had the Edison Plan provided that the Plan, and not Edison, was responsible for the Plan's administrative expense, these issues would likely have been avoided completely. If, as in Tibble, the employer pays those costs – but pays them only after applying any revenue sharing to the service provider's bills – the plan should say so expressly in order to minimize any issue of plan interpretation.
Finally, in all cases, sponsors should review their plan language, and make sure that it clearly provides that the fiduciaries have discretion to interpret the plan terms. Absent that clear grant of discretion, courts may not defer to their interpretation of the plan terms, in which case the court, rather than the plan fiduciaries, will determine the appropriate interpretation of the plan.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.