Despite Upholding A $13.4 Million Judgment Against Plan Fiduciaries, The Eighth Circuit Gives Plan Sponsors A Lot To Like In Tussey Decision

On March 19, 2014, a three judge panel of the United States Court of Appeals for the Eighth Circuit issued its decision in Tussey v. ABB, Inc., No. 12-2056 (8th Cir. Mar. 19, 2014).  The case came to the Eighth Circuit on an appeal of a decision by the United States District Court for the Western District of Missouri awarding participants in ABB, Inc.’s 401(k) Plan (the “Plan”) $13.4 million in damages related to the Plan’s fiduciaries’ failure to control the cost of recordkeeping services provided to the Plan and $21.8 million in damages for losses participants suffered as a result of a change in investments options offered under the Plan.  In addition, the District Court found the Plan’s recordkeeper (Fidelity) liable to Plan participants for $1.7 million  of lost float income, and ordered Fidelity and the fiduciaries of the Plan to pay more than $13.4 million in attorney fees and costs.  Despite the fact the Eighth Circuit upheld the $13.4 million judgment against the Plan fiduciaries for failure to control recordkeeping costs, many aspects of the Circuit Court’s ruling are favorable for plan sponsors – the appellate court recognized that the determinations of plan administrators are owed deference by courts, the $21.8 million judgment against the Plan fiduciaries was vacated, and the judgment against the Plan fiduciaries which was undisturbed was based on facts specific to the case.

First, the Eighth Circuit held when plans grant plan administrators discretion to interpret and construe the terms of the plan, courts must defer to the plan administrator’s interpretation or construction of the plan so long as it is reasonable.  Thus, the District Court in this case erred when it failed to grant any deference to the ABB Plan’s determinations regarding the Plan.  In reaching this conclusion, the Eighth Circuit rejected the claim of the Plan participants that courts only owe such deference to benefit claim determinations, and that courts should review other determinations de novo.  Instead, the Eighth Circuit joined the Ninth, Seventh, Sixth, Third, and Second Circuits, in holding deference to the determinations of plan administrators is not limited to benefit claims.  Having an additional circuit recognize that deference is owed to plan administrators for non-benefit claims should give plan administrators  more confidence the judicial system will respect their interpretations of their own plans.

Second, the Eighth Circuit vacated the District Court judgment and $21.8 million award against the Plan fiduciaries stemming from their decision to change the investment options offered under the Plan.  In 2000, the fiduciaries of the Plan decided to remove the Vanguard Wellington Fund as an investment option and replace it with Fidelity Freedom Funds.  The Plan fiduciaries accommodated those Plan participants with money in the Wellington Fund who had not specified an alternate investment for their balances by mapping funds held in the Wellington Fund to the age appropriate Freedom Funds.  Because the District Court opinion cited the fact that “between 2000 and 2008 the Wellington Fund outperformed the Freedom Funds,” when finding mapping of the funds breached a duty to the participants, the Plan fiduciaries argued the court’s analysis reflected “an improper hindsight bias” and an erroneous substitution of the court’s “own de novo . . . view of the ideal Plan investments. . . .”

The Court of Appeals concluded the Plan fiduciaries’ “points are well taken” and ruled that the reasonableness of the Plan’s investment choices must be determined based on analysis of what the Plan fiduciaries knew at the time the investment options were selected, and not the options’ subsequent performance.  Furthermore, the District Court failed to afford the Plan administrator’s interpretation of the Plan document in regards to investment options the appropriate amount of deference.  Because the Eighth Circuit could not determine if the District Court would have decided the Plan fiduciaries breached their duty if it applied the appropriate standard of review, it vacated the judgment on this claim and remanded the claim for further consideration.  A reminder to district courts that the prudence of investment decisions made by plan sponsors must be judged based only on the information available at the time of the decision, and not the subsequent performance of the investment, may help reduce the tendency of participants to litigate when investment returns fail to meet expectations.

Third, where the Eighth Circuit allowed the judgment against the Plan fiduciaries to stand, it did so because of the specific facts of the case.  The District Court found the Plan fiduciaries violated their duties “when they agreed to pay Fidelity an amount that exceeded market costs for Plan [recordkeeping] services in order to subsidize the [other] corporate services provided to ABB by Fidelity, such as ABB’s payroll and recordkeeping for ABB’s health and welfare plan and its defined benefit plan” and awarded Plan participants $13.4 million in damages based on this breach.  On appeal, the Plan fiduciaries argued the District Court finding on this point was in error because the District Court “‘implied that certain business arrangements, such as bundling of investment management and recordkeeping services through a single provider,’ were automatically improper.”  The Eighth Circuit rejected this interpretation of the District Court’s decision and instead concluded that the District Court’s determination that the Plan fiduciaries breached their duties to the Plan in regards to the recordkeeping fees Fidelity charged was amply supported by the record given that the Plan fiduciaries failed to take any action or make any investigation of the recordkeeping fees after Fidelity informed the Plan fiduciaries it provided other services to ABB for free or at below market cost and an outside consulting firm informed the Plan fiduciaries ABB was overpaying for recordkeeping services performed by Fidelity.  The existence of these facts explain the Eighth Circuit’s refusal to set aside the judgment against the Plan fiduciaries on this claim, and should also limit the precedential value of this case in situations where plan fiduciaries can show that they have adequately evaluated the recordkeeping fees the plan pays  and are not using amounts paid under a plan to subsidize other corporate expenses.

Thus, while the Eighth Circuit did ultimately uphold a $13.4 million judgment against the Plan fiduciaries, several elements of the opinion augur well for plan sponsors and employers.  Increasing judicial recognition of the respect that courts should pay a plan administrator’s reasonable interpretation of plan provisions and of the proper factors to consider when judging the prudence of investment selection may reduce the number of good faith decisions made by plan fiduciaries which become the subject of participant litigation.  In addition, the Tussey case should remind plan sponsors that simply hiring a market leader, such as Fidelity, is not sufficient in itself to discharge fiduciary duties.  Fiduciaries must scrutinize the actions of even reputable service providers and investigate information tending to show the plan is being overcharged.

Topics:  401k, Breach of Contract, Damages, Fiduciary Duty, Plan Administrators, Retirement Plan, Standard of Review, Vacated

Published In: Business Torts Updates, Civil Procedure Updates, Finance & Banking Updates, Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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