The U.S. Supreme Court is scheduled to hear arguments Tuesday in
a case that could have broad implications for the way millions of
Americans save for retirement.
The court will focus on a narrow issue concerning the statute of
limitations in the case, called Tibble v. Edison International. A
ruling against Edison could trigger a wave of lawsuits against
companies over the way they set up and manage 401(k) retirement
accounts and similar plans, according to lawyers not involved with
the case.
Tibble is one of 13 class-action lawsuits filed in the past
eight years that have accused U.S. companies, including Boeing Co.
and Massachusetts Mutual Life Insurance Co., of failing to act in
the best interest of employees who participate in their 401(k)
plans. The issues include failing to monitor excessive fees,
favoring some high-cost retail mutual funds over lower-cost options
and funneling employee savings into investment products managed by
affiliate companies.
The case comes as the Obama administration is placing heightened
scrutiny on retirement plans, the fees they charge and the
potential for adviser conflicts.
The Labor Department is devising new fiduciary rules that force
financial advisers to act in the best interest of customers when
steering them into retirement products such as 401(k)s. The
Securities and Exchange Commission is also at work defining new
fiduciary standards.
Employees use 401(k) plans to save pretax dollars for
retirement, and many companies offer matching contributions for
part of those savings. By the end of September, the most recent
data available, the plans had $4.5 trillion in assets, making up
18% of all retirement assets, according to the Investment Company
Institute, a trade group.
All of the 401(k) lawsuits, including Tibble, are led by one
lawyer: Jerome Schlichter of the St. Louis firm Schlichter Bogard
& Denton LLP. Mr. Schlichter has used the cases to push large
U.S. companies to cut plan costs and improve fee disclosures.
"These issues have been off in a dark closet for 40 years
without scrutiny of any significant amount," said the 66-year-old
Mr. Schlichter, a former labor and personal-injury lawyer.
"Whenever you have a situation like that, some people are going to
act in their self-interest."
He has settled seven suits with companies such as Kraft Foods
Group Inc. and Lockheed Martin Corp. for a collective $187 million.
On Friday, the details of Lockheed's $62 million settlement were
disclosed. The Bethesda, Md.-based defense firm was accused of
failing to monitor its $26 billion plan for excessive fees and
failing to properly disclose fees and expenses to its 100,000 plan
participants.
Lockheed said "the settlement--which is less than 5% of the
plaintiffs' claimed damages--is not an admission of liability or
wrongdoing."
Once the settlements are approved by a judge, the money paid
goes to plan participants, with Mr. Schlichter's firm typically
taking a 30% cut.
The string of lawsuits has put a spotlight on 401(k) plans,
which had been largely ignored until now, said Fred Reich, a lawyer
at Drinker Biddle & Reath LLP, a law firm based in
Philadelphia, who specializes in issues related to the Employee
Retirement Income Security Act, or Erisa, which governs 401(k)
plans.
"They highlight the responsibility of plan sponsors not just to
use reasonably priced investments, but to use their purchasing
power to get the lowest-cost ones," he said.
All of the companies that have settled have also agreed to make
changes to the plans and lower costs for employees and retirees.
Some agreed to drop certain types of investments from their
offerings.
A MassMutual spokesman said the company is waiting on a judge's
ruling on its motion to dismiss the case. "We strongly believe the
plaintiffs' complaint is without merit," he said. Kraft and Boeing
declined to comment.
Edison's lawyers have argued in court filings that stricter
fiduciary requirements "would impose extraordinary administrative
costs on plans, sponsors, and participants, contrary to Erisa's
objectives."
Originally filed in 2007, the Tibble lawsuit accused the
Rosemead, Calif., utility of breaching its duty to offer "prudent"
investments because its selections included retail shares of mutual
funds rather than the lower-cost institutional shares of the same
mutual funds. Glenn Tibble was an employee of Edison and a
participant in its retirement plan, according to court
documents.
The suit also accuses Edison's plan of failing to use its
discretion to review and change fund selections periodically in the
interest of participants. It said the plan could have changed
investment selections even years after they were chosen but failed
to do so.
Five groups filed briefs supporting that argument, including
AARP, the advocacy group Pension Rights Center and the U.S.
solicitor general.
Edison International has received support from trade groups such
as the Securities Industry and Financial Markets Association and
the National Association of Manufacturers, which said the outcome
could put a chilling effect on 401(k) plan sponsors.
"It would burden plan fiduciaries with new and continuing duties
that would increase the likelihood of litigation," the
manufacturers group wrote in its friend-of-the-court brief.
One possible outcome, regardless of which way the court rules,
could be that plans move away from mutual funds and take on
lower-cost ways of investing, such as collective trusts or
separately managed accounts, said some observers.
Write to Liz Moyer at liz.moyer@wsj.com
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