ICI Submits Brief in Retail vs. Institutional Funds Case

In an amicus curiae brief submitted to the 9th U.S. Circuit Court of Appeals, ICI contends the plaintiffs’ argument that what they call “retail” mutual funds should not be offered to plan participants rests upon unfounded premises about the costs and benefits of such mutual funds and their potential alternatives. ICI noted that research, including its own, demonstrates that the expenses borne by mutual fund investors in 401(k) plans compare well to alternatives.

In addition, the Institute warned the court to be wary of misleading comparisons between the expenses of mutual funds—which include not only investment advisory fees, but also expenses for other services of value to plan participants—and the investment advisory fees (alone) of alternatives such as collective trusts.

According to the brief, plaintiffs also claim prudent fiduciaries should not offer money-market mutual funds (or short-term investment funds with similar features); instead, they argue, fiduciaries should always opt for stable-value funds. “Although Plaintiffs claim stable value funds always provide a better investment return without increased risk to the investor, that argument disregards material differences between stable value funds and money market funds—particularly with regard to liquidity risk. Given the differences, while a prudent fiduciary could decide to offer a stable value fund, that type of investment is not inherently superior (or inferior) to a money market fund or short-term investment fund,” the brief said.
 

ICI explained large defined contribution plans such as the Edison Plan typically allow thousands of participants to make and to change investment options as frequently as daily. Those participants include people with varied investment strategies and goals; they typically include some who want to emphasize liquidity in anticipation of an upcoming distribution from the plan. Because participants are allowed by the plan to make investment decisions, the availability of information in a readily-understood format can be an important factor in choosing the options provided to them. 

“Mutual funds are designed to pool the capital of numerous investors in order to assemble a portfolio of investments that meets each fund’s stated strategy and objectives. Investors in mutual funds benefit from the protections that stem from the strict regulatory requirements for registered mutual funds under securities laws and SEC regulations. Because mutual funds are designed (and required by law) to meet the transactional and informational needs of numerous investors, mutual funds are well suited for use as investment options for defined contributions plans,” the brief states. 

Last July, U.S. District Judge Stephen V. Wilson of the U.S. District Court for the Central District of California declared that Southern California Edison (SCE) and its plan fiduciaries violated the duty of prudence imposed by the Employee Retirement Income Security Act (ERISA) by not properly investigating the differences between selecting retail shares instead of institutional shares (see “Court Buys Retail vs. Institutional Share Fee Claim”). 

U.S. Secretary of Labor Hilda L. Solis agreed with that decision but asked the 9th Circuit to reconsider the district court’s decision that most of the plaintiffs' prudence and prohibited transaction claims were time-barred (see “Solis Argues Prudence Claims Should not be Time-Barred”). 

Earlier this month, the California Employment Law Council (CELC), a non-profit organization that says it works to promote a better legal climate for California employers, asked the 9th U.S. Circuit Court of Appeals to reverse the district court’s finding, saying the evidence shows the procedurally prudent process by which Southern California Edison and its fiduciaries selected the plan’s investments satisfied the Employee Retirement Income Security Act (ERISA).  
 
The Council argued that plaintiffs and their amici ask the court to disregard fundamental employer protections built into ERISA and develop new standards which would make it overly burdensome and costly for the average employer to sponsor retirement plans (see “Legal Group Wants Ruling on Use of Retail Funds Reversed”).

The ICI brief can be found at http://ici.org/pdf/25383.pdf.