In 2012, the Western District of Missouri entered one of the first verdicts against plan fiduciaries based upon the fees paid by a plan. That same ruling also imposed the very first verdict against a service provider based upon its handling of “float” income. On March 19, the United States Court of Appeals for the Eighth Circuit reversed the float ruling, as well other aspects of the case, while affirming the decision against the fiduciaries based upon the fees paid. What led the Court to the split decision?
ABB, Inc. sponsored two 401(k) plans that were at issue, one for unionized employees and one for non-unionized employees. The plans were administered by committees and individual employees who were also named as defendants (collectively, “ABB”). Fidelity Management Trust Company and Fidelity Management & Research Company (collectively, “Fidelity”) were named as defendants based upon their respective roles as the plans’ investment adviser and record keeper.
A major issue in the case was over the amount of fees paid to Fidelity. Fidelity was paid solely by revenue sharing fees – i.e., by receiving a portion of the fees received by mutual funds for the plans’ investments in those funds – for the non-union plan, while Fidelity was paid a combination of a flat fee and revenue sharing for the union plan. When Fidelity negotiated with ABB over all of the various services it provided, Fidelity informed ABB that Fidelity was charging ABB for its services to other ABB health and welfare plans at amounts below market cost and that Fidelity was not charging ABB anything for administering other plans sponsored by ABB. Based upon this, an outside consultant advised ABB that it was overpaying Fidelity fees with respect to the 401(k) plans and that might be subsidizing expenses that ABB itself would have to pay for other services provided by Fidelity. However, ABB did not act on this advice.
At trial, the District Court held that the plans had substantial purchasing power – with over $1.4 billion in assets – to negotiate reduced costs but failed to do so. The District Court also found that the plans’ investment policy statement (“IPS”) required ABB to negotiate rebates and revenue sharing in order to reduce the plans’ costs, but that ABB had failed to do so. The District held that the first failure breached ABB’s duty of prudence under ERISA § 404(a)(1)(B), while the second failure breached the duty to follow the terms of the plans under Section 404(a)(1)(D).
A second issue in the case involved a redesign of the plans’ investment options. Specifically, in 2000, the ABB defendants removed the Vanguard Wellington Fund (“VWF”) as an investment option and replaced them with the Fidelity Freedom Funds (“FFF”). The District Court held that the process for removing the VWF as an investment option was not done in accordance with the IPS and, therefore, was a breach of fiduciary duty under Section 404(a)(1)(D).
A third category of claims in the case was brought against Fidelity based upon its handling of “float” income, which is the interest and income earned on investments between the time a contribution is made and when that money is subsequently invested and/or the income earned between the time a disbursement is requested and the time that it is ultimately paid. Fidelity used float to pay fees on float accounts and proportionately allocated the remainder to the plans’ investment options, thereby benefitting all shareholders (and not just plan participants) who invested in those investment options. Fidelity did not directly receive any revenue from the float.
The District Court held that Fidelity’s handling of float violated ERISA for two reasons. First, the District Court held that the use of float was in violation of the plans’ trust agreements because the trust agreement only allowed Fidelity to be paid through revenue sharing and that the use of float to pay fees on float accounts effectively constituted additional income for Fidelity. Additionally, the District Court held that because the payment of float benefited all shareholders of the investment options, and not just the plans’ participants, this was a breach of Fidelity’s duty to act solely in the interest of the plans’ participants under ERISA § 404(a)(1)(A).
On appeal, the Eighth Circuit only upheld one of the District Court’s rulings. As a starting point, the Eighth Circuit held that the District Court had failed to provide the proper level of deference to ABB. The Eighth Circuit held that the terms of the plans broadly granted discretionary authority to ABB and that, therefore, ABB’s decisions could not be disturbed so long as they were reasonable. However, the District Court had been largely silent as to the standard of review and its analysis gave little, if any, deference to ABB. The Eighth Circuit rejected the plaintiffs’ arguments that grants of discretionary authority were limited to benefit claims, but found that they also included claims for breach of fiduciary duty.
Notwithstanding the District Court’s failure to afford ABB the proper deference, the Eighth Circuit held that failure was harmless with respect to the ruling against ABB regarding the amount of fees paid by the plans. The Eighth Circuit held that there was adequate evidence to support that decision, even allowing deference to ABB, including that ABB’s own consultant warned ABB that the plans were overpaying Fidelity and that those payments might be subsidizing ABB’s corporate expenses paid to Fidelity.
However, that was the only ruling against the defendants that the Eighth Circuit affirmed. With regard to the plans replacement of the VWF with the FFF, the Eighth Circuit credited ABB’s arguments that the District Court had incorrectly substituted its own, de novo interpretation of the IPS in determining that the IPS had not been followed, rather than providing deference to ABB’s decision. Specifically, the Eighth Circuit rejected the District Court’s use of hindsight – the District Court relied upon the fact that after the VWF was replaced with the FFF, the VWF outperformed the FFF – as a basis for concluding that ABB breached its fiduciary duties. Thus, the Eighth Circuit remanded to the District Court to determine whether, under a deferential standard of review, ABB had breached its fiduciary duty based upon the circumstances the plans’ fiduciaries at the time they replaced the VWF with the FFF.
Finally, the Eighth Circuit rejected the plaintiffs’ arguments that float was an ERISA plan asset. As the Eighth Circuit explained, once contributions were used to purchase investment shares, the plans no longer had any property right in the money that was used to purchase those shares. Rather, the Eighth Circuit held that in the absence of any evidence that the plans retained a property interest, the float was the property of the investment options to which the money had been paid, and not the plans. As such, the float was not a plan asset and Fidelity could not be liable under ERISA for how the float was handled.
Based upon the Eighth Circuit’s decision, it also remanded the District Court to reconsider its award of nearly $13.5 million in attorneys’ fees and costs based upon the remand of the mapping claim and the complete reversal regarding Fidelity.
This case is highly important from a defense perspective both because of the Eighth Circuit’s conclusion that float is not a plan asset, and also due to its conclusion that a deferential standard of review is applicable to a breach of fiduciary duty claim if the terms of the plan so allow. These aspects of the decision could have wide-ranging implications for future litigation. While the Eighth Circuit did uphold the decision against ABB with respect to the fee claims, that portion of the decision is based in large part upon the very bad facts at issue in this case, including that ABB was specifically advised that the fees being paid were too high and that the plans were subsidizing ABB’s corporate expenses.
The case is Tussey v. ABB, Inc., No. 12-2056, 2014 WL 1044831 (8th Cir. Mar. 19, 2014).