On March 19, the U.S. Court of Appeals for the Eighth Circuit affirmed, reversed, and vacated in part the district court’s opinion in Tussey v. ABB, Inc. that had awarded ABB 401(k) plan participants $36.9 million in damages arising from fiduciary breaches related to the defendants’ failure to monitor recordkeeping expenses and revenue sharing arrangements, the failure to prudently select and monitor investment options and the improper use of float income. The appellate court upheld the district court’s $13.4 million judgment against ABB Inc. (“ABB”) for its excessive recordkeeping fees paid to Fidelity Management Trust Company (“Fidelity”), but the court vacated the district court’s $21.8 million judgment against ABB related to the mapping of plan assets from the Vanguard Wellington Fund to Fidelity target date funds. The Court also reversed the $1.7 million judgment against Fidelity related to float income generated from interest on plan contributions and distributions.
While the Eighth Circuit’s decision is a mixed bag for plan sponsors, it does provide some key lessons going forward.
Plaintiffs were participants in two 401(k) plans sponsored and administered by ABB. Fidelity served as the recordkeeper for the ABB 401(k) plans, but also provided other corporate services (such as payroll) and recordkeeping services for ABB’s health and welfare plans as well. ABB paid Fidelity primarily through a revenue sharing arrangement under which Fidelity received a percentage of the revenue earned by mutual fund investment options chosen by ABB plan participants. Plaintiffs sued ABB fiduciaries on behalf of a class claiming that ABB had breached its fiduciary duties by:
- Failing to monitor recordkeeping fees and revenue sharing;
- Failing to prudently select and monitor investments;
- Improperly subsidizing corporate expenses through excessive fee sharing; and
- Failing to provide sufficiently separate accounts.
Plaintiffs also brought a claim against Fidelity for improper use of float income.
Following a 16-day bench trial, the district court ruled in favor of ABB’s plan participants on several claims, including:
- $13.4 million against ABB for its failure to monitor and control recordkeeping fees paid to Fidelity, despite notice that the fees were allegedly excessive and used to subsidize non-plan expenses;
- $21.8 million against ABB for its imprudent decision to remove the Vanguard Wellington Fund and add Fidelity target date funds to the plan’s investment choices and to map the investments from the Wellington Fund to Fidelity target date funds;
- $1.7 million against Fidelity for its retention of float income earned on plan contributions and distributions; and
- $13.4 million in attorney’s fees and costs to plaintiffs, assessed jointly and severally against all ABB and Fidelity defendants.
The district court’s reasoning behind these decisions is discussed in full in our April 2012 newsletter.
Lesson 1: Deference Matters
ABB fiduciaries argued on appeal that the district court had failed to afford any deference to the plan administrator, which “infected its entire analysis.” 1 Under an abuse of discretion standard of review, a court will defer to a fiduciary’s interpretation of the plan’s terms so long as it is reasonable. The Court agreed that ABB fiduciaries raised a “legitimate question” about whether the district court had applied the correct standard of review, because its opinion was silent on the matter. Plaintiffs argued that the abuse of discretion standard of review only applied to ERISA claims for benefits, not to claims for breach of fiduciary duty; therefore, a de novo standard of review should apply. The Court sided with ABB fiduciaries, stating that “[t]he participants misunderstand the nature of ERISA and ignore the application of trust principles to the exercise of ERISA fiduciary discretion under ERISA’s provisions.” 2 In reaching this conclusion, the Court noted that its opinion was in line with the majority of federal circuits — including the Third, Sixth, Seventh, and Ninth — that have found the deferential standard of review applies to ERISA claims outside of the benefit claims context.
The Court’s determination that the deferential standard of review may apply to breach of fiduciary claims is important for plan sponsors, because it means that a fiduciary’s interpretation of plan terms will not generally be subject to the exacting scrutiny of de novo review. However, this decision also highlights the importance of including plan document language that grants broad discretion to plan fiduciaries to interpret plan language as well as establishing a clear administrative record that shows plan fiduciaries conducted a sufficient and thorough review of plan investment options and fees.
Lesson 2: Plan Fees, Revenue Sharing Arrangements Must Be Carefully Scrutinized
ABB fiduciaries also challenged the district court’s decision to award participants $13.4 million for failure to monitor and control recordkeeping fees and for paying excessive revenue sharing from plan assets to subsidize the cost of Fidelity’s other corporate services to ABB. Relying on recent decisions in other fee cases, ABB argued that because the plan offered a wide range of investment options from which a participant could select low-priced funds, the claim of unreasonable recordkeeping fees was misplaced. The Court rejected this argument, however, stating that ABB’s reliance on these cases was erroneous because the facts of this case, unlike the cases relied upon by ABB, involved serious allegations of wrongdoing such as the failure to (1) calculate what the Plan was paying in recordkeeping fees through revenue sharing, (2) determine whether Fidelity’s pricing was competitive, (3) adequately leverage the plan’s size to reduce fees, and (4) make a good faith effort to prevent subsidization of administrative costs of ABB’s corporate services with Plan assets. Accordingly, the Court upheld the district court’s award of $13.4 million in excessive fees and found that the award amount was not an abuse of discretion.
The Court’s decision to uphold the district court’s determination is a strong reminder to plan sponsors that simply having a wide range of investment options is not enough to avoid a breach of fiduciary duties under ERISA. Plan sponsors must still conduct and document careful analysis with respect to fees and revenue sharing arrangements to ensure that such expenses are reasonable and competitive based on the plan’s size.
Lesson 3: Hindsight Influence by the Court is Improper
Next, ABB fiduciaries challenged the district court’s $21.8 million award for breach of fiduciary duty relating to ABB’s decision to eliminate the Vanguard Wellington Fund to add Fidelity target date funds and to map investments from the Vanguard Wellington Fund to Fidelity target date funds. ABB argued that the court substituted its “own de novo interpretation of the Plan”, in favor of the “reasoned judgment” of the plan’s fiduciaries.3 The Court found that the district court’s opinion showed “clear signs of hindsight influence regarding the market for target date funds at the time of the redesign and the investment options’ subsequent performance.”4 The Court noted that, while it is easy to pick an investment in retrospect, selecting an investment beforehand is difficult and, accordingly, a plan sponsor must be afforded deference with respect to their investment choices. Because the district court failed to make clear whether it afforded ABB deference with respect to its investment decisions in accordance with the plan documents, the Court vacated the district court’s $21.8 million judgment as speculative and excessive and remanded this claim for further consideration.
The Court’s holding with respect to ABB’s investment decisions is an important one for two reasons. First, the Court clearly found that the district court’s application of hindsight in its evaluation of ABB’s investment decisions was improper, which will be helpful in future fee and investment litigation cases. Second, this decision highlights the importance of affording plan fiduciaries a deferential standard of review.
Lesson 4: Float Income May Not be a Plan Asset
Finally, the Court considered Fidelity’s challenge to the district court’s $1.7 million judgment against it for breach of the duty of loyalty by failing to pay float income to the ABB 401(k) plans. Fidelity argued that based on basic property rights, the mutual fund investment options offered in the ABB plans — not the plans themselves — owned the float and bore the risk of loss. The Court, in a divided panel on this point, agreed, finding that plaintiffs had not shown that the float income under the facts of this case was a plan asset within the meaning of ERISA and, therefore, reversed the $1.7 million judgment against Fidelity for the retention of float income by the mutual funds.
The dissenting judge on the float issue cited Department of Labor (“DOL”) guidance stating that float is a plan asset and requiring disclosure of float income by plan service providers. Given the Court’s split on float and the existing DOL guidance, plan sponsors and service providers can expect this issue to be the subject of further litigation.
In light of the above decisions, the Court also vacated the district court’s $13.4 million award for attorney’s fees and costs to plaintiffs and directed the district court to reconsider the fee award.
Implications of the Tussey Decision
While the sting of the district court’s $36.9 million award has been lessened by the Eighth Circuit’s decision in Tussey, the decision is not a complete win for plan sponsors, and they should still heed caution when it comes to monitoring plan investments and fees. The Court’s decision to apply an abuse of discretion standard of review and its recognition of improper hindsight influence are wins for plan sponsors in that a fiduciary’s reasonable interpretation of plan terms should not be overturned by a court, and courts cannot rely on hindsight influence in determining whether a fiduciary’s investment decisions were proper. On the other hand, the Court’s decision to affirm the $13.4 million award for ABB’s failure to properly monitor recordkeeping fees is a strong reminder to plan sponsors to closely monitor and understand their plan’s fees and to compare them to the marketplace.
1 Tussey v. ABB, Inc., No. 12-2056, 12-2060, 12-3794, 12-3875, Slip Op. at 11 (8th Cir. Mar. 19, 2014).
2 Id., citing Firestone Tire & Rubber Co. v. Bruch, 489 U.S.101, 111 and Cox v. Mid-America Dairymen, Inc., 965 F.2d 569, 572 (8th Cir. 1992).
3 Slip Op., p. 18