U.S. Appeals Court Affirms Judgment Against 401(k) Plan Fiduciaries for Excessive Recordkeeping Fees

by McCarter & English, LLP
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On March 19, 2014, the U.S. Court of Appeals for the Eight Circuit (the “Appeals Court”) issued its highly anticipated ruling in the case of Tussey v. ABB, Inc., affirming a Missouri trial court’s $13.4 million judgment against ABB, Inc. (including its plan investment and administrative committees), for its failure to control 401(k) plan recordkeeping costs.  The decision by the Appeals Court underscores the importance of procedural due diligence on the part of plan fiduciaries and the need to regularly review and examine recordkeeping and other vendor fees that are being charged to plan participants.

Background
 
Under ABB’s 401(k) plan (the “ABB Plan”), participants were permitted to direct the investment of their account balances among available investment options, which generally consisted of mutual funds selected by ABB.  Fidelity, the recordkeeper for the ABB Plan, was primarily paid through a revenue-sharing arrangement, whereby Fidelity received a percentage of the income that the mutual funds received from the plan participants’ investments.  Fidelity provided additional administrative services to ABB unrelated to the ABB Plan, including payroll processing and recordkeeping functions for ABB’s defined benefit and welfare plans. 

The plaintiffs, a class of ABB Plan participants, brought suit against ABB and Fidelity, alleging fiduciary violations.  In 2012, the Missouri trial court ruled against ABB and awarded the participants $13.4 million for ABB’s failure to control recordkeeping costs and $21.8 million for losses relating to ABB’s mapping of funds when it removed an investment option under the plan.  In addition, the trial court ruled against Fidelity and awarded the participants $1.7 million for lost “float” income.

Recordkeeping Costs

The Appeals Court affirmed the trial court’s $13.4 million judgment against ABB for its failure to control recordkeeping costs.  According to the Appeals Court, the following factual findings at the trial court level supported the conclusion that ABB breached its fiduciary duties to the ABB Plan:  (i) ABB failed to calculate the amount the plan was paying Fidelity for recordkeeping through revenue sharing; (ii) ABB failed to determine whether Fidelity’s pricing was competitive; (iii) ABB failed to adequately leverage the plan’s size to reduce fees (i.e., negotiate rebates); and (iv) ABB failed to “make a good faith effort to prevent the subsidization of administration costs of ABB’s corporate services” with ABB Plan assets, even after ABB’s consultant notified ABB that the recordkeeping fees might be subsidizing ABB’s other corporate services. 

Investment Options and Mapping   

The Appeals Court vacated the trial court’s $21.8 million judgment against ABB for claims relating to the ABB Plan’s investment options and the “mapping” of plan assets, and sent the claims back to the trial court for further consideration.  The participants’ claims arose from ABB’s decision to remove a Vanguard fund that it believed had “deteriorating performance,” and to map the funds therein to the age-appropriate Fidelity target-date fund.  Relying on its interpretation of the ABB Plan and the plan’s investment policy statement, the trial court held that ABB breached its fiduciary duties.  However, the Appeals Court agreed with ABB’s contention on appeal that the trial court’s analysis showed “improper hindsight bias.”  In this regard, the Appeals Court noted that the ABB Plan administrator “deserves discretion to the extent its  . . .  investment choices were reasonable given what it knew at the time [the investment decisions were made].”  Further, it was not clear to the Appeals Court that the trial court applied the correct standard in reviewing the actions of ABB (discussed in more detail below). 

Fidelity’s Retention of Float Income

The Appeals Court reversed the trial court’s $1.7 million judgment against Fidelity for failing to pay to the ABB Plan “float” income generated by Fidelity (i.e., income from money temporarily held in a depository account before it is distributed to plan investment options).  In reversing the trial court’s decision, the Appeals Court found that the participants failed to demonstrate that the float income constituted “plan assets.”

Standard of Review

A key procedural issue addressed in the case was whether the trial court should have applied the “abuse of discretion” standard with respect to ABB’s fiduciary determinations that were made outside the benefits claim context.  Briefly stated, it is well-established under ERISA case law that where the plan document so provides, the plan administrator’s determination under the plan should be reviewed for “abuse of discretion” and be overturned only if the determination is unreasonable.  The Appeals Court rejected the participants’ argument that this deferential standard of review is applicable only to “discretionary benefits claim determinations” and noted that the trial court should have reviewed ABB’s determination under the “abuse of discretion” standard.  Presumably, the trial court will be applying that standard of review in further evaluating whether ABB breached its fiduciary duties at the time it selected investment options for the ABB Plan (i.e., the selection and mapping of the Fidelity target-date funds).

* * *

Certain aspects of the Appeals Court’s holding are generally favorable to plan sponsors (for example, the court’s discussion of “improper hindsight bias” and its holding regarding the appropriate standard of review).  Nevertheless, the ABB case illustrates the importance of having the plan sponsor’s board of directors (or appropriate plan committee) meet regularly to ensure procedural due diligence, including with respect to the selection of investment options and the monitoring of recordkeeping fees.  As so aptly noted in the Appeals Court’s opinion (quoting a prior case), “the prudent person standard is not concerned with results; rather, it is a test of how the fiduciary acted viewed from the perspective of the time of the challenged decision . . . .”

 

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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