On March 19, the Eighth Circuit addressed a long-running case involving alleged fiduciary duty breaches in the administration of 401(k) plans. (Tussey v. ABB, Inc.)  Although the Eighth Circuit emphasized that courts owe deference to choices entrusted by plan documents to fiduciary discretion – and reversed one finding of liability partly on that basis – the decision affirmed a finding that plan fiduciaries in this case are liable for $13.4 million for failing to monitor and assess the reasonableness of the plan recordkeeper’s compensation from revenue sharing.

Tussey was among a wave of plan expense cases filed in 2006; a 16-day trial occurred in 2010.  Two years later, the trial court ruled that:

  • The plan’s fiduciaries breached their responsibilities with respect to 401(k) plan fees paid to the plan’s recordkeeper, Fidelity, by (i) failing to monitor the level of fees (particularly fees from revenue sharing); (ii) failing to negotiate rebates from Fidelity or the plan’s investment funds; and (iii) failing to select the least expensive share class for certain funds.  The court noted that, as a result of the compensation that Fidelity received from the 401(k) plan (mostly through revenue sharing from mutual funds), Fidelity was able to provide discounts to ABB for other services, such as health plan administration;
  • The fiduciaries also imprudently replaced a Vanguard mutual fund with Fidelity-managed target date funds; and
  • Fidelity improperly failed to allocate to the plans the interest earned by brief deposits of contributions and disbursements going to or from investment options (“float”).

The trial court assessed the fiduciaries’ liability to the plans at more than $35 million, ruled that Fidelity owned $1.7 million related to float, and held both the fiduciaries and Fidelity liable for more than $13 million in attorneys’ fees and costs.

The appellate court reversed the trial court in part, remanding the target date fund ruling for reconsideration and exonerating Fidelity with regard to float. But the Eighth Circuit affirmed the $13.4 million judgment against the fiduciaries for failing to ensure that the recordkeeper’s revenue-sharing income was not unreasonable and not subsidizing the provision of other Fidelity services to ABB.

Although it did not absolve the fiduciaries of all liability, the Eighth Circuit reaffirmed two important principles with regard to reviewing a fiduciary’s conduct.

  • First, the court applied a deferential standard of review. Citing the Firestone doctrine, the court observed that plan documents expressly gave the plan administrator discretion in several areas, including interpretation of plan terms and selection of investment funds.  In light of this discretion, the court stated that it would not overturn the fiduciaries’ interpretation of the plan documents (including an investment policy statement) as long as it was reasonable.
  • Second, the court reaffirmed that ERISA’s prudent person standard focuses on fiduciary conduct when making decisions – not the later results of those decisions. With those principles in mind, the court held that the trial court’s decision concerning the selection and mapping of new target date funds improperly second-guessed fiduciaries on the basis of hindsight. “The Plan administrator deserves discretion to the extent its ex ante investment choices were reasonable given what it knew at the time.” Because it was far from certain the trial court would have reached its conclusions if applying “the required deferential standard of review” to the fiduciaries’ implementation of the decision to replace an existing option (the Vanguard Wellington Fund) with Fidelity target date funds, the Eighth Circuit vacated that breach finding and remanded for reconsideration by the trial court under the proper deferential standard.

The Eighth Circuit also found error in the trial court’s method for assessing investment-related damages. The trial court speculated that all participants who were mapped from the Wellington Fund to Fidelity target date funds would have remained in the Wellington Fund and earned nearly $22 million more than they actually earned in the target date funds. “Such an inference appears to ignore the investment provisions of the [investment policy statement, which required the addition of managed allocation options], participant choice under the Plan, and the popularity of managed allocation funds.”

The Eighth Circuit also reversed the imposition of liability on Fidelity regarding float. Under the facts of the case, the court concluded that such money did not constitute plan assets, because contributions to the plans were credited to participant accounts as shares in selected investment options at the closing price on the date of contribution. The plans were entitled that day to dividends or other changes in each fund. Meanwhile, the contributed money flowed to a depository account for the benefit of the investment options whose shares were obtained by the plans. Simply put, as soon as the plans owned such shares, they no longer owned the money being deposited overnight that were used to purchase those shares. Because contributed dollars were no longer plan assets, Fidelity owed no duty to use interest they earned for the benefit of the plans. (One circuit judge dissented from this part of the panel decision.)

But with respect to recordkeeping fees, the Eighth Circuit did not disturb the trial court’s judgment against the fiduciaries. The appellate court concluded that evidence supported findings that plan fiduciaries did not calculate the amount of asset-based revenue sharing that Fidelity was receiving or determine whether Fidelity’s pricing was competitive. And there was evidence that fiduciaries did not make a sufficient effort to ensure that income from the plans was not subsidizing other services, such as payroll, that Fidelity provided to ABB itself – even after a consultant notified ABB of such concerns. The Eighth Circuit also affirmed the trial court’s decision to credit an expert’s testimony that the plans suffered $13.4 million in harm as a result of the excessive recordkeeping fees.

It is worth recalling that regulations implemented by DOL in 2012 now require “covered service providers” such as plan recordkeepers to disclose the amount of indirect compensation such as revenue sharing to fiduciaries. While it no longer falls to fiduciaries to perform their own calculations of such compensation for recordkeeping, the Tussey decision highlights the importance of making appropriate use of such data.