On August 16, 2007, a group of employees of Edison International filed a lawsuit in U.S. District Court for the Central District of California, alleging that the company's 401(k) plan engaged in a variety of activities that breached their fiduciary duties to plan participants under the Employee Retirement Income Security Act (ERISA).
The plaintiffs claim that the defendants chose unreasonably expensive investment options and improperly used the participants' money to offset the administrative expenses of the 401(k) plan.
On October 22, 2007, Edison filed a motion to dismiss the case and, on November 5, 2007, the plaintiffs filed a memorandum in opposition. A reply brief was filed by the defendants on November 13, 2007.
The Court ruled in July 2008 that the plaintiffs sufficiently alleged a potential breach of fiduciary duties and rejected, in part, the motion to dismiss the case. The plaintiffs filed an amended complaint on August 5, 2008, and discovery in the case followed.
The trial was held in October 2009 and a decision was issued on July 8, 2010. In his decision, the district court judge evaluated the plaintiffs' argument that the defendants violated their fiduciary duties under ERISA by investing in the retail share classes of six mutual funds, instead of the less expensive institutional share classes of the same funds. The retail share classes of the six mutual funds offered more favorable revenue-sharing payments to Edison, which reduced their expenses in administering the 401(k) plan.
The judge held that the defendants did breach their fiduciary duties by choosing to invest in the retail share classes of three of the six mutual funds rather than the institutional share classes of the same funds. The defendants did not violate their fiduciary duties regarding the other three mutual funds because the initial selection of these funds occurred outside of the six-year statutute of limitations for ERISA claims.
Appeals were filed with the Ninth Circuit Court of Appeals. After briefing and an oral argument, the Court of Appeals affirmed the District Court's decision on March 21, 2013. In its decision, the Court stated that the District Court correctly measured the timeliness of ERISA claims outside of the six-year statute of limitations. The Court also affirmed the lower court's holding that the defendants were imprudent to include retail share classes of three mutual funds in the plan after failing to investigate institutional share class alternatives.
This Court of Appeals decision was amended on August 1, 2013, and a petition for rehearing was denied.
The plaintiffs then filed a petition for a writ of certiorari with the U.S. Supreme Court on October 30, 2013. After requesting a brief from the Solicitor General, the Supreme Court decided to grant the petition on October 2, 2014.
The issue before the Supreme Court is whether a claim that ERISA plan fiduciaries breached their duty of prudence by offering higher cost retail mutual funds over less expensive institutional class funds, when the higher cost funds were initially selected outside of the six-year statute of limitations for ERISA claims.
In a unanimous decision on May 18, 2015, the Supreme Court reversed the 9th Circuit and ruled that the six-year statute of limitations was not a bar to this type of fiduciary duty claim. The Court stated that the ERISA fiduciary duty is derived from the common law of trusts, which provides that a trustee has a continuing duty--separate and apart from the duty to exercise prudence in selecting investments at the outset--to monitor, and remove imprudent, trust investments.
The case has been remanded back to the lower courts.