The Eighth Circuit Court of Appeals decided a case in which it addressed a variety of fiduciary breaches alleged by employees participating in an employer’s 401(k) plans. Under the plans, each participant decided how to allocate individual contributions among the investment options selected to be part of the plans. The participants sued the plan fiduciaries and Fidelity Management Trust Company.

The federal district court that first heard the case found the plan fiduciaries guilty of a number of fiduciary breaches that included a failure to monitor recordkeeping costs, a failure to negotiate rebates for the plans from either Fidelity or other investment companies, selecting more expensive share classes for the plans’ investment platform when less expensive share classes were available, and removing the Vanguard Wellington Fund from the investment fund lineup and replacing it with Fidelity’s Freedom Funds. The district court also found that the employer and its employee benefits committee violated their fiduciary duties by agreeing to pay Fidelity an amount that exceeded market costs for plan services to subsidize other corporate services provided to the employer by Fidelity, including payroll services and recordkeeping for the employer’s defined benefit and health-welfare plans. Finally, the district court found that Fidelity breached its fiduciary duties to the plans when it failed to distribute float income solely for the interest of the plans and further violated its fiduciary duties when it transferred float income to the plans’ investment options instead of the plans.

Several millions of dollars were awarded for the losses and damages suffered as a result of these breaches. The plan fiduciaries and Fidelity appealed the decision of the district court. The Eighth Circuit Court of Appeals affirmed, reversed, and vacated various portions of the district court’s decision.

Standard of Review. The Eighth Circuit opinion points out that the district court never clearly identified the specific standard of review that would be used by the court to review the actions taken the by the plans’ fiduciaries. Given the grant of discretion in this case, the Eighth Circuit concluded that the district court should have reviewed the determinations of the plans’ fiduciaries under the more deferential abuse of discretion standard, and should not have engaged in a de novo review of those determinations. Under the “abuse of discretion” standard, the court must uphold a fiduciary’s interpretation of a plan as long as it is “reasonable.” The Eighth Circuit noted that the plans gave plan fiduciaries and administrators (and their agents) “sole and absolute discretion” to determine plan eligibility and plan benefits, and empowered them “to take any other actions with respect to questions arising in connection with the plan, including...the construction and interpretation of the terms of the plan.” That broad grant of discretionary authority, the Eight Circuit concluded, entitles the plan fiduciary or administrator “to deference in exercising that discretion.”

Failure to Monitor Recordkeeping Costs. The Eighth Circuit ruled that the district court did not err by concluding that the plan fiduciaries failed to monitor and control recordkeeping fees and paid excessive revenue sharing from plan assets to subsidize the employer’s other corporate services. The Eighth Circuit ruled that record supported the district court’s conclusion that the plan fiduciaries failed to (1) calculate the amount the plans were paying Fidelity for recordkeeping through revenue sharing, (2) determine whether Fidelity’s pricing was competitive, (3) adequately leverage each plan’s size to reduce fees, and (4) make a good-faith effort to prevent the subsidization of administration costs of the employer’s other corporate services with plan assets, even after the employer’s own outside consultant notified the employer the plan was overpaying for recordkeeping and might be subsidizing the employer’s other corporate services. The Eighth Circuit also ruled that the district court’s failure to afford deference to the plan administrator’s interpretation of the plans with respect to recordkeeping and revenue sharing was harmless under the circumstances. As a result, a $13.4 million judgment against the employer was upheld.

Selection of Plan Investment Options and Mapping. With regard to the removal of the Vanguard Wellington Fund and mapping from the Wellington Fund to Fidelity’s Freedom Funds, the Eighth Circuit found that the district court erroneously substituted its own de novo plan interpretation and view of the ideal plan investments for the reasoned judgment of the plan fiduciaries. The Eighth Circuit concluded that the district court did not show appropriate deference to the plan fiduciaries in evaluating whether they, based on what they knew at the time they made their investment decisions, breached their fiduciary duties in evaluating, selecting, and implementing the new plan investment fund option. The Eighth Circuit also concluded that the district court’s opinion improperly relied on hindsight to evaluate the prudence of the investment selection. As a result, the Eighth Circuit vacated the district court’s $21.8 million judgment and award on this claim and remanded it for further consideration.

Float Income. Fidelity appealed the district court’s conclusion that Fidelity breached its fiduciary duties of loyalty by failing to pay float income to the plans (i.e., interest income accrued on plan contributions held in a depository account before those contributions are invested in a selected investment option). Fidelity argued that, as a matter of basic property rights, the investment options, not the plans, owned the float and bore the risk of loss with respect to the float accounts and thus were entitled to any benefits of ownership. The evidence indicated that when a contribution was made, Fidelity credited the participant’s plan account, and the plan became the owner of the shares of the selected investment option (typically, shares of a mutual fund) the same day the contribution was received. Once the plan became the owner of the shares, it was no longer also owner of the money used to purchase them. As a result, the investment funds, not the plans, held the property rights in the depository float and were entitled to the float income. Accordingly, the Eighth Circuit ruled that Fidelity did not breach any fiduciary duties with respect to the depository account. The Eighth Circuit also ruled that the participants failed to establish the plans had any rights in the redemption account balance (i.e., the account that holds funds pending the participant’s cashing of a distribution check). The participants did not cite any record in evidence establishing the plans as the owner of the funds in the redemption account and, absent proof of any ownership rights to the funds in the redemption account, the plan had no right to float income from that account. The Eighth Circuit was not unanimous on the float income issue. A dissenting opinion argued that contributions to the plans are plan assets at the time they are placed into Fidelity’s depository account, thus making depository float income a plan asset that Fidelity improperly used for its own benefit. (Tussey v. ABB, Inc., 8th Circuit, 2014)