On March 19, 2014, a panel of the Eighth Circuit Court of Appeals affirmed in part, vacated in part, reversed in part and remanded the district court’s decision in the first ERISA excessive fee case to go to a full trial on substantively all claims brought, in Tussey et al. v. ABB, Inc. et al.
Participants in two 401(k) plans sponsored by a single employer (collectively, the “Plan”), brought a putative class action on behalf of all Plan participants against the employer, individuals and entities related to the employer who had responsibility for the plan or its investments (collectively, the “Sponsor”), as well as the Plan’s trustee and recordkeeper, and the advisor to certain Plan investments (collectively, the “Provider”). The complaint broadly challenged the recordkeeping and investment costs of the Plan.
After a 16-day bench trial, the district court made a number of factual findings and entered judgment against the defendants as to some, but not all, of the claims asserted by the participants. Specifically, the trial court held that the Sponsor was liable for $13.4 million for allegedly excessive recordkeeping costs on the ground that the Sponsor breached fiduciary duties by, among other things, failing to monitor the costs, paying costs that exceeded the market rate and selecting share classes of investments for the menu that were more expensive than other available alternatives. It also had held the Sponsor liable for an additional $21.8 million in damages in connection with the Sponsor’s decision in 2000 to remove a balanced fund from the Plan and map the assets to the Provider’s age-appropriate target-date funds, which the court held was the result of an insufficient fiduciary process.
The district court also held the Provider liable for its treatment of income earned on assets in the process of being transferred to, or redeemed from, Plan investment options (“float”), awarding the plaintiffs $1.7 million in damages. The district court had held that float and float income were plan assets, and that the Provider failed to distribute “float income solely for the interests of the Plan.”
The trial court awarded attorneys’ fees of $12,947,747.68 and costs of $489,985.00, with the Sponsor and Provider jointly and severally liable.
On appeal, the Eighth Circuit panel agreed with the Sponsor that the manner in which Plan recordkeeping was paid, through revenue sharing and bundled service arrangements, was a “common and ‘acceptable’ investment industry practice that frequently inure[s] to the benefit of ERISA plans.” Nonetheless, the court affirmed the judgment against the Sponsor for excessive recordkeeping costs given the trial court’s finding of facts that, among other things, the Sponsor made an insufficient investigation of those costs.
The court next vacated the judgment against the Sponsor relating to the mapping of assets in the balanced fund to target-date funds, and remanded for further proceedings. The court held that the trial court’s decision that the balanced fund outperformed the target-date funds after the mapping was infected by improper hindsight bias. Further, the court held that the district court did not appear to have given the proper deference to the decision of the Sponsor, given that Plan provisions that reposed “sole and absolute discretion” on the Plan administrator to take actions with respect to the Plan and to construe its terms. The circuit joined others that have held that such deference should be afforded even outside the benefits context, given the court’s “general hesitancy to interfere with the administration of a benefits plan,” and the fact that such deference furthers the balance struck in ERISA between competing interests of “ensuring fair and prompt enforcement of rights under a plan and the encouragement of the creation of such plans.”
The appellate court also provided guidance as to damages methodology that the district court should apply if it again found a breach of duty with respect to investment selection on remand. Although the court left open the heavily litigated question as to whether an Investment Policy Statement (“IPS”) is a binding plan document, given that the IPS there required that the Plan fiduciary add an asset allocation fund, the court stated that any damages should not be measured by the performance of a target-date fund as compared to the now-removed balanced fund. Second, if the trial court does award damages based on the mapping of one fund to another, it should not assume that all voluntary, post-mapping investments would have instead been made in the since-removed fund had that fund remained in the Plan.
The court agreed with the Provider’s argument that, based on basic principles of property rights, float is not a plan asset. With respect to Plan contributions, the court held that the Plan was credited with ownership of shares of the investment options on the day the contributions were received, and thereafter the Plan no longer had an ownership interest in the funds used to purchase those shares. With respect to redemptions from the Plan investment options, the court found that participants adduced no evidence that the Plan owned the funds in the redemption account. Accordingly, because the participants “failed to show that float was a Plan asset,” the judgment against the Provider was reversed.
The court held that while the attorney’s rate used by the district court to establish a fee award was “generous,” it was not outside the district court’s discretion. However, the court vacated and remanded the fee award given the decision to vacate and remand the investment selection claim. It also ruled that the award could no longer be jointly and severally applied to the Provider, since the Provider could no longer be liable for any fees or costs given the reversal of the float judgment.
Goodwin Procter represented parties in this litigation.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.