Additional Thoughts on the Latest Tussey v. ABB Decision: Fiduciary Lessons Aplenty

As we covered in our last post, the district court’s latest decision in Tussey v. ABB found ABB breached their fiduciary duties but imposed no monetary damages on a procedural technicality. The moral victory for the plaintiffs, however, can still prove to be instructive for other fiduciaries responsible for the selection and monitoring of plan investments. Based on this case, past case law, as well as Department of Labor publications including the most recently issued Field Assistance Bulletin 2015-02, there are six basic obligations a fiduciary must consider when selecting and monitoring investments including:

  1. Engage in an objective, thorough and analytical search,
  2. Avoid self-dealing, conflicts of interest, or other improper influence,
  3. Consider the risk associated with the investment versus alternatives,
  4. Consider ALL costs in relationship to services provided,
  5. Ensure the investment is diversified to minimize the risk of large losses, and
  6. Consult with experts when that expertise is lacking.

Not adhering to this six step process, ultimately resulted in a finding of a breach. According to the court, “ABB’s inconsistent explanations for removing the Wellington Fund and mapping its assets to Fidelity Freedom Funds, the fact that ABB took a substantial part of the PRISM Plan’s assets and put them in an investment that was so new that ABB needed to make an exception to the IPS, and Fidelity’s explicit offer to give ABB a better deal if the Wellington assets were mapped into the Fidelity Freedom Funds” were all reasons cited for the court’s conclusion that ABB was conflicted when it chose to replace Wellington with Fidelity Freedom Funds. Had ABB adhered to the six step process, the outcome would likely have been different because documentation showing compliance with ERISA’s fiduciary duties would have been in place to exonerate ABB.

So what is the lesson here for other ERISA fiduciaries? If you are faced with the opportunity to reduce costs by using proprietary investments, consider documenting your reasons to adopt proprietary funds by answering the following questions:

  1. Are we using proprietary funds?
  2. Are we replacing an existing fund with a proprietary fund?
  3. Have we selected proprietary funds based on the standards and criteria established in the IPS?
  4. If an exception is necessary to use a proprietary fund, should we change the IPS standards and criteria permanently?
  5. Are we using a proprietary fund because it is in the best interests of participants or because it reduces the cost to the Plan Sponsor?
  6. How are we accounting for any additional revenue sharing from the use of the proprietary funds?

It is worth noting that case law has not prohibited the use of proprietary funds, the collection of revenue sharing, or the payment of plan expenses from plan assets. However, fiduciaries must understand that the use of proprietary funds creates an opportunity for additional liability issues to arise that must carefully and deliberately be addressed.

On Remand, Tussey v. ABB Defendants Found to Breach ERISA but Win on Procedural Technicality

Yesterday, July 9, 2015, the district court in Tussey v. ABB ruled on the issues remanded from the 8th Circuit’s mixed decision last year. While the court found the ABB defendants breached their ERISA fiduciary duties, the court ultimately held the ABB defendants victorious because the plaintiffs failed to provide damages calculations consistent with the 8th Circuit’s narrow mandate.

The district court began its decision with a summary of its task on remand:

The Eighth Circuit remanded this case for application of the Firestone abuse of discretion standard to the Defendants’ decision to remove the Vanguard Wellington Fund from the PRISM Plan and transfer its assets to the Fidelity Freedom Funds.

As a recap, the 8th Circuit is one of the first circuit courts in the country to hold that ERISA fiduciaries deserve deference with regard to violations of ERISA 404 and/or 406:

Like most circuits to address the issue, we see no compelling reason to limit Firestone deference to benefit claims. “‘Where discretion is conferred upon the trustee with respect to the exercise of a power, its exercise is not subject to control by the court except to prevent an abuse by the trustee of his discretion.’” Firestone, 489 U.S. at 111, 109 S.Ct. 948 (quoting Restatement (Second) of Trusts § 187 (1959) (alterations omitted)). “This deferential standard reflects our general hesitancy to interfere with the administration of a benefits plan.” Layes v. Mead Corp., 132 F.3d 1246, 1250 (8th Cir. 1998). Given the grant of discretion in this case, the district court should have reviewed the Plan administrator’s determinations under the Plan for an abuse of discretion.

The district then reanalyzed the conduct of the ABB fiduciaries. The court held the ABB fiduciaries breached ERISA’s fiduciary duties when they improperly eliminated the Vanguard Wellington Funds from their plans and replaced it with the Fidelity Freedom Fund lineup. The district court found that this move was motivated by the goal of increasing revenue sharing to Fidelity in order to make large profits on the 401(k) plans, which benefited ABB by keeping hard dollar recordkeeping costs low (which ABB was responsible for) and also keeping the corporate plans with Fidelity at below market pricing.

[T]he Court finds it more likely than not that ABB decided to remove the Wellington Fund and map its assets into the Fidelity Freedom Funds to benefit ABB. The Court cannot say this was its sole motivation. Lifestyle funds were coming into vogue at this time and the Wellington Fund had a short period when it did not perform as well as it had previously. However, given the procedural irregularities including the strong performance of the Wellington Fund during the time period specifically identified in the IPS, ABB’s inconsistent explanations for removing the Wellington Fund and mapping its assets to Fidelity Freedom Funds, the fact that ABB took a substantial part of the PRISM Plan’s assets and put them in an investment that was so new that ABB needed to make an exception to the IPS, and Fidelity’s explicit offer to give ABB a better deal if the Wellington assets were mapped into the Fidelity Freedom Funds, the Court is confident that ABB was conflicted when it chose to take the Wellington Fund assets and put them into the Fidelity Freedom Funds. The Court finds that there are too many coincidences to make the beneficial outcome for ABB serendipitous, particularly considering the powerful draw of self-interest when transactions are occurring out of sight and are unlikely to ever be discovered.

The district court then discussed the Firestone abuse of discretion standard:

Given all these factors, the Court finds that ABB abused its discretion when it removed the Wellington Fund and mapped its assets into the Fidelity Freedom Funds. It is more likely than not that but for its conflict of interest, ABB would not have made the same decisions.

The district court then discussed the narrow interpretation of how damages should be calculated as declared by the 8th Circuit, which stated:

On remand, the district court should reevaluate its method of calculating the damage award, if any, for the participants’ investment selection and mapping claims. See Peabody v. Davis, 636 F.3d 368, 373 (7th Cir. 2011) (clarifying in an ERISA case that “[t]he method of calculating damages is reviewed de novo; the calculations pursuant to the method are reviewed for clear error”). First, the district court awarded the amount that participants who had invested in the Wellington Fund presumably would have had if (1) ABB had not replaced the Wellington Fund with the Freedom Funds, and (2) the participants remained invested in the Wellington Fund for the entire period at issue. In light of the IPS requirement to add a managed allocation fund, it seems the participants’ mapping damages, if any, would be more accurately measured by comparing the difference between the performance of the Freedom Funds and the minimum return of the subset of managed allocation funds the ABB fiduciaries could have chosen without breaching their fiduciary obligations.

Ultimately, the district court found that the plaintiffs failed to present the damages calculations as required by the 8th Circuit:

Plaintiffs argue that this method for calculating damages is wrong, citing precedent that suggests that the proper measure of damages would be the prudent alternative that provides the largest damages unless the breaching fiduciary sustains their burden of proof to establish that a lower yielding award is justified. See Dardaganis v. Grace Capital Inc., 889 F.2d 1237, 1244 (2d Cir. 1989) (“the District Court should presume that, but for the breach, the funds would have been invested in the most profitable of the alternative and the errant fiduciary bears the burden of proving that the fund would have earned less than this amount.”); see also Donovan v. Bierwirth, 754 F.2d 1049, 1056 (2d Cir. 1985) (“Where several alternative investment strategies were equally plausible, the court should presume that the funds would have been used in the most profitable of these.”); see Roth v. Sawyer-Cleator Lumber Co., 61 F.3d 599, 602 (8th Cir. 1995) (citing Bierwirth with approval). But even if the Court assumes that the performance of the alternative target fund that had the highest rate of return would be the proper measure of damages, Plaintiffs have presented no evidence of what that figure would be. Given that the Eighth Circuit has suggested a measure of damages, the Court finds that measure persuasive and Plaintiffs have failed to present evidence of the only measure of damages that the Eighth Circuit has tacitly approved. Therefore, Plaintiffs have failed to satisfy their burden of proof on the issue of damages.

Our Thoughts

Without a doubt, the outcome of this decision has been driven by the unique procedural aspects of the case, rather than substantive ones. For ERISA fiduciaries that might take comfort, don’t. The plaintiffs bar will adapt and the proper damages calculations as required by the court will be presented in all cases in the future. But even these plaintiffs may still get another bite at the apple, as they have every right to appeal the case again to the 8th Circuit, which must hear it, and even the district court stated:

If the Court has misread the Eighth Circuit, its decision is subject to de novo review and can be corrected on appeal.

ERISA fiduciaries should instead carefully study the court’s description of what it held were breakdowns in the fiduciaries’ process in analyzing and selecting investments, as well as handling their own conflicts of interests and fees paid to providers. There are very clear lessons to be learned.