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Case Highlights the Perils of Revenue Sharing

The Tibble v. Edison International case brings some interesting issues to light.

W. Scott Simon, 01/06/2011

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Much commentary has been generated about Tibble v. Edison International, the first 401(k) excessive investment fee case to go to trial that resulted in a judgment. A federal district court judge in California awarded damages of $370,732 to Glenn Tibble, et al. against Edison, et al. in August 2010. This being America, naturally both Tibble and Edison have appealed the judge's ruling to the U.S. Ninth Circuit Court of Appeals.

I thought it might be of interest to go into some detail in describing the plan governance involved in running a large retirement plan such as the Edison 401(k) plan. That would include the various fiduciary entities comprising Edison's decision-making structure and how they rely on internal staff and outside advisors.

Glenn Tibble is a participant in the Edison 401(k) Savings Plan and lead plaintiff in a class action lawsuit against defendants Edison International, which is the parent company of Southern California Edison Company, the sponsor of the plan; the Southern California Edison Company Benefits Committee; the Edison International Trust Investment Committee; the TIC Chairman's Subcommittee; and certain named fiduciaries of the plan (the defendants).

Administration. The Benefits Committee is the ERISA section 3(16) Plan Administrator of the plan. Members of the Benefits Committee are appointed by the SCE CEO and report to the SCE board of directors. The benefits administration staff is responsible for implementing administrative changes to the plan, overseeing the budget for plan administration costs and monitoring the on-going performance of the plan's record-keeper, Hewitt Associates. Hewitt Associates is responsible for preparing reports concerning the plan that are sent to plan participants and regulators, and maintaining a system that participants can access to make changes to their contributions and investment elections in the plan.

Investments. The SCE and the Edison Board of Directors delegates the authority to select and monitor the plan's investment options to the TIC. (If the TIC were an entity outside of Edison--a bank, insurance company or RIA--then it would be an ERISA section 3(38) Investment Manager with this delegation). The TIC can delegate certain investment responsibilities to the Sub-TIC, which focuses on the selection of specific investment options. The TIC and the Sub-TIC (the investment committees) are fiduciaries of the plan.

The investment committees have the discretionary authority to select, maintain and replace the plan's investment options. SCE's investments staff provides information and recommendations to the investment committees regarding which plan investment options to retain or replace, and is responsible for monitoring and evaluating them. The investments staff does not have any authority over the administration of the plan, the selection of the plan's third-party service providers, or the selection of the plan's investment options (during the relevant time period of Tibble, the Edison plan's menu of investment options had approximately 40 mutual funds available for selection by plan participants).

The investments staff attends the quarterly meetings of the investment committees and gives presentations regarding the plan's overall performance. The investments staff presents information regarding the performance of specific investment options and recommends changes in the plan's menu such as adding or deleting investment options. The investment committees, which have discretion to accept or reject the recommendations of the investments staff, usually accept such recommendations.

W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He is the author of two books, one of which, The Prudent Investor Act: A Guide to Understanding is the definitive work on modern prudent fiduciary investing.

Simon provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. He is a member of the State Bar of California, a Certified Financial Planner, and an Accredited Investment Fiduciary Analyst. Simon's certification as an AIFA qualifies him to conduct independent fiduciary reviews for those concerned about their responsibilities investing the assets of endowments and foundations, ERISA retirement plans, private family trusts, public employee retirement plans as well as high net worth individuals.

For more information about Simon, please visitPrudent Investor Advisors, or you can e-mail him at wssimon@prudentllc.com

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar.

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