by Thomas E. Clark Jr., JD LLM – March 19, 2014
Today, March 19, 2014, the 8th Circuit Court of Appeals affirmed, reverse, and vacated the trial court’s decision in Tussey v. ABB. The decision is effectively a mixed bag for plan sponsors, participants, and service providers.
(1) The plaintiffs won the issue of excessive recordkeeping fees against ABB. This will stand barring any appeals by ABB;
(2) ABB won a procedural victory on the issue of share class choice and the mapping of the Wellington Fund to the Fidelity Freedom Funds. The district court will have to decide the issue again, as explained below, using the guidance as provided by the 8th Circuit; and
(3) Fidelity won the issue of float interest. It has now defeated all claims against it, barring any further appeals by the plaintiffs.
Let’s dive in:
The opinion starts with a discussion of whether plan fiduciaries are entitled to a certain level of discretion in having their decision making analyzed by a court. The defendants in the case wanted the decisions to be looked at through an “abuse of discretion” standard vs. a “de novo” standard advocated by the plaintiffs. This is a highly contested issue right now, as providing a fiduciary with discretion in interpreting their own fiduciary responsibilities is not explicit in the ERISA statute. Instead, it is has become a creature of case law, starting with the Fire Stone case and recently being a lynch pin in the 9th Circuit’s decision in Tibble v. Edison. The very issue is in fact still being petitioned to the Supreme Court by the plaintiffs in Tibble, which goes to conference this Friday to decide whether the Supreme Court will hear the case.
Of important note, the 8th Circuit rejected ABB’s argument that all breaches found by the district court were only breaches of the plans’ IPS, rather than independent breaches of ERISA’s fiduciary duties. As such, the 8th Circuit declined to rule whether an IPS is or should be considered a “plan document.”
Nonetheless, the 8th Circuit has concluded that the district court judge failed to analyze the fiduciaries decisions through an abuse of discretion framework and that this was in error, although, as we will see, the consequences only matter for one claim.
Excessive Recordkeeping Fees
The court affirmed the trial court’s decision that the 401(k) plans sponsored by ABB paid excessive recordkeeping fees and that this was a breach of ERISA’s fiduciary duties. The court rejected application of cases like Hecker v. Deere, and instead found that based on the facts and circumstances present and the testimony of plaintiffs’ expert, that the recordkeeping fees were excessive.
The court also rejected the argument by defendants that the plaintiffs were simply attacking bundled services and the use of revenue sharing. Instead, the court found:
The district court did not condemn bundling services or revenue sharing, which are common and “acceptable” investment industry practices that frequently inure to the benefit of ERISA plans. Rather, the district court found the ABB fiduciaries breached their duties to the Plan by failing diligently to investigate Fidelity and monitor Plan recordkeeping costs based on the ABB fiduciaries’ specific failings in this case. The district court found, as a matter of fact, that the ABB fiduciaries failed to (1) calculate the amount the Plan was paying Fidelity for recordkeeping 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 the subsidization of administration costs of ABB corporate services” with Plan assets, even after ABB’s own outside consultant notified ABB the Plan was overpaying for recordkeeping and might be subsidizing ABB’s other corporate services.
Finally, the 8th Circuit found that despite the district court’s failure to use an abuse of discretion standard, this was harmless error as the facts were so overwhelming in favor of finding a breach. As such, this claim was affirmed.
Mapping of Wellington Fund to Fidelity Freedom Funds
First, the court rejected defendants statute of limitations argument, finding that:
The last fiduciary acts constituting the alleged breach—amending the trust agreements, removing the Wellington Fund as an investment option, selecting the Freedom Funds, and mapping Plan assets to the Freedom Funds—all took place
during or after March 2001, bringing them within the six-year statute of limitation. The district court correctly determined the participants’ mapping claim was timely.
Second, the 8th Circuit found that the district should have used an abuse of discretion standard to review the breach claim, as well as was too influenced by hindsight facts, such as the eventual performance of the Wellington Funds as compared to the performance of the Fidelity Freedom Funds. As such, the court vacated the district court’s decision and remanded back for it to again decide the issue using a more deferential standard.
Third, because the court remanded, they never then addressed the share class issue that the district court addressed similar to the claims in Tibble, affirmed by the 9th Circuit.
In a victory for the Fidelity defendants, the 8th Circuit, citing principles of property law advocated by Fidelity, found that the plaintiffs failed to show that the forms of float at issue were in fact plan assets. Thus, the court found that Fidelity could not have breached any fiduciary duties, as none are required when not dealing with plan assets, as alleged. Thus, this part of the district court’s opinion is reversed and final, as far as the 8th Circuit is concerned (barring any further appeals as discussed below).
However, Judge Bye of the 8th Circuit filed a dissenting opinion, arguing that he was persuaded by the ERISA regulations and DOL agency authority that float was in fact a plan asset, and that he would have found that Fidelity breached its duties.
This quick summary of the opinion is our promise to get you these decisions promptly. We will be writing more in the near future as the opinion is digested further.
As to what happens next, I cam easily imagine that all parties (except Fidelity who is now off the hook entirely) will want to file a petition to have the entire 8th Circuit “en banc” hear the case. We should know quickly enough whether this will happen and I wouldn’t be surprised to see it granted to have this decision looked at again. Beyond that, I can assure you that this case will be petition to the Supreme Court, whether or not the 8th Circuit decides to hear it en banc.