Tag Archives: Tussey v. ABB

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.

 

 

8th Circuit Denies Both Rehearing Petitions in Tussey v. ABB – Next Up is the Supreme Court

On Tuesday, May 20, 2014, the 8th Circuit Court of Appeals denied both the plaintiffs’ and ABB’s petitions for rehearing in Tussey v. ABB, Inc. Without explanation, both the original panel of three judges and the court en banc, meaning all active judges of the 8th Circuit, declined to rehear the case.

As we previously laid out when the original decision came down ( see Tussey v. ABB Affirmed, Reversed, and Vacated in Part by 8th Circuit) ultimately this case is going to be appealed to the US Supreme Court, almost without a doubt by both the plaintiffs and by ABB. Because the US Supreme Court only hears about 100 cases out of 10,000+ appealed to them each year, the chances are slim that the case will be taken. On the other hand, they’ve recently shown interest in ERISA fiduciary matters by agreeing to hear an appeal of the 6th Circuit’s stock drop jurisprudence (see Supreme Court Will Hear Stock Drop Appeals) and their request for DOL input on the plaintiffs’ appeal in Tibble v. Edison (see Supreme Court Requests DOL Opinion in Tibble v. Edison Petition). We should expect an opinion in the stock drop case any time between now and the end of June.

If the Supreme Court declines to hear either party’s appeal in Tussey, then the case will ultimately be remanded back to the district court to re-decide the investment claims under an abuse of discretion standard. And in that scenario, the following issues will be considered final regardless of the remand: (1) Fidelity will have succeeded in defeating all claims against it, and (2) ABB will have have been found liable for paying excessive recordkeeping fees to Fidelity.

Supreme Court Requests DOL Opinion in Tibble v. Edison Petition

Today, March 24, 2014, the Supreme Court announced the results of their Friday conference where the plaintiffs’ cert petition from the Tibble v. Edison International case was considered. In a surprise move, the Supreme Court has asked the Solicitor General of the United States, working in conjunction with the Secretary of the Department of Labor, to file a brief offering their view on the issues. We have previously discussed the 9th Circuit opinion that plaintiffs are seeking to have heard, the rehearing opinion issued by the 9th Circuit panel, and the plaintiffs’ petition to the Supreme Court.

Many might remember that this is exactly what happened in Fifth Third Bancorp v. Dudenhoeffer, the case set for oral argument before the Supreme Court on April 2 concerning stock stop cases and the so called Moench Presumption. There, the Supreme Court requested the DOL’s views and shortly thereafter granted the petition to hear the case. (to read the briefs from the Fifth Third case, head over to the SCOTUSBlog website which is the preeminent source for information related to the Supreme Court)

As a reminder to our readers, the plaintiffs in Tibble are seeking to have the following issues heard by the Supreme Court:

1. Notwithstanding the ongoing nature of ERISA’s fiduciary duties, does the statute of limitations under 29 U.S.C. §1113(1) immunize 401(k) plan fiduciaries for retaining imprudent investments that continue to cause the plan losses if the funds were first included in the plan more than six years ago?

2. Does Firestone deference apply to fiduciary breach actions under 29 U.S.C. §1132(a)(2), where the fiduciary allegedly violated the terms of the governing plan document in a manner that favors the financial interests of the plan sponsor at the expense of plan participants?

In our opinion, these issues are ripe for decision by the Supreme Court. Defining exactly how the 6 year statute of limitation should be interpreted would provide needed clarity to both plan participants and plan sponsors. Additionally, as we mentioned last week, the issue of deference to ERISA fiduciaries could not be more timely, as the 8th Circuit in the Tussey v. ABB appeal found that the district court should have viewed the action of the ABB defendants with regard to investment decisions at issue in the case through a lens of deference. The idea of deference as to the interpretation of a fiduciary’s own duties under ERISA is not something that appears in the plain text of the statute and is a relatively new court created doctrine. There is much disagreement in the legal and scholarly community so to whether deference is appropriate and we should expect to hear those opinions voiced in the coming weeks.

As to what the DOL will say, we can be reasonably sure they will agree with the plaintiffs as to the statute of limitations issue, as they are on record many many times in filed amicus briefs supporting an interpretation that is favorable to plan participants. As to the issue of deference, I am not aware of any previously filed positions by the DOL but I wouldn’t be surprised to see them agree with the plaintiffs again on this issue.

If that is the case, then the question becomes, what will the Supreme Court do? Will they agree to hear the case? In the last go around with the Fifth Third petition, many legal observers made the argument that when the Supreme Court asks for the Solicitor General’s opinion, it greatly increases the chances the case will be heard. (for the truly interested, this law review article does a very good job of empirically analyzing the success of petitions when a response is requested and when the solicitor general’s opinion is requested, both of which happened here)

We here on this blog are not in the business of tea leaf reading and we will not make a prediction. Instead, the only thing we can promise is that when the DOL files their brief and when the Supreme Court makes their decision,  you will hear about it here expeditiously.