When a retirement plan manages employees' money, it also has a responsibility to keep an eye on the expenses that can quietly erode away earnings. The Eighth Circuit affirms an ERISA breach of fiduciary duty judgment against two retirement plans for allowing its recordkeeper to overcharge the fund for services, and orders the return of $13.4 million. The court nonetheless vacates for further proceedings a claim for inappropriate investment options, and reverses (over a dissent) a judgment that the plan recordkeeper converted short-term funds (a "float") to non-plan purposes.
Tussey v. ABB, Inc., No. 12-2056 (8th Cir. Mar. 19, 2014): The employer and plan sponsor ABB set up a 401(k) plan which eventually drew over 14,000 participants and held $1.4 billion in assets. In 1995, the plan hired Fidelity as recordkeeper.
In 2005, ABB and Fidelity "negotiated a comprehensive agreement covering both Fidelity's services to the Plan and the other corporate services Fidelity provided to ABB." ABB entered the deal against the advice of an outside consulting agency that ABB was "overpaying for Plan recordkeeping services ... caution[ing] that the revenue sharing Fidelity received under the Plan might have been subsidizing the other corporate services Fidelity provided to ABB."
In this lawsuit, a class of ABB 401(k) participants made three claims of breach of fiduciary duty. The first, against ABB's plan fiduciaries and Employee Benefits Committee (EBC), was "agreeing to pay to Fidelity an amount that exceeded market costs for Plan services in order to subsidize the corporate services provided to ABB by Fidelity," such as managing its health and welfare plans. Related to this claim was the fiduciaries' failure to leverage the size of the assets to negotiate reduced fees. The second, against the ABB fiduciaries, was for selecting allegedly overpriced share classes and removing a balanced fund option (the Vanguard Wellington Fund) that it then "mapped" (or, using as a default fund for participants in Wellington) to the poorer-performing Fidelity Freedom Funds . Third, the participants claimed that Fidelity used money that sat overnight on deposit before it was distributed (the "float") to earn interest, which it then used to cover fees instead of paying directly into the plan.
After a 16-day bench trial, the district court granted judgment against the defendants on these three claims, awarding to the plan $13.4 million for failing to control recordkeeping costs and $21.8 million for losses allegedly suffered as a result of mapping from the Wellington Fund to the Freedom Funds. The district court also awarded $1.7 million against Fidelity for the lost float income. The defendants were held jointly and severally liable for more than $13.4 million in attorney fees and costs.
The Eighth Circuit affirms on the recordkeeping expenses, vacates and remands the mapping claim, and outright dismisses the "float" claim.
On the recordkeeping claim, the fiduciaries' main contention was that the decisions about fund expenses was discretionary, and that the district court erred by failing to credit any discretion to the Plan administrator. Here, the panel recognizes that the district court may have erred in its analysis: the circuit holds (in an issue of first impression) that even fiduciary acts outside of the benefit context could only be reviewed for abuse of discretion. The district court did not rigorously apply the more indulgent standard of abuse-of-discretion in reviewing the ABB fiduciaries' decisions. Yet the panel finds this error harmless, and affirms the judgment, on the ground that "by failing diligently to investigate Fidelity and monitor Plan recordkeeping costs," it fell so far below any standard of fiduciary management that the participants would have prevailed in any case.
"The district court found, as a matter of fact, that the ABB fiduciaries failed to (1) calculate the amount the Plan was paying Fidelity for recordkeeping through revenue sharing, (2) determine whether Fidelity's pricing was competitive, (3) adequately leverage the Plan's size to reduce fees, and (4) 'make a good faith effort to prevent the subsidization of administration costs of ABB corporate services' with Plan assets, even after ABB's own outside consultant notified ABB the Plan was overpaying for recordkeeping and might be subsidizing ABB's other corporate services."
The panel also affirms the $13.4 million award against the fiduciaries, over a challenge to the reliability and admissibility of the participants' expert witness.
Yet the panel strips away the participants' other wins on appeal. On the investment-strategy "mapping" claim, the panel holds that the district court paid too little deference to the fiduciaries' judgment. "The Plan administrator deserves discretion to the extent its ex ante investment choices were reasonable given what it knew at the time." The panel remands with direction to reexamine the record under the proper standard of judicial review; it also holds that the $21.8 million award was, in any event, speculative in its assumptions about what plan participants would have done if the Wellington Fund had not been removed from the plan's investment platform. On the "float" claim, the panel majority orders entry of judgment to the fiduciaries outright, holding (over a dissent) that the float was not a plan asset: "the Plan investment options held the property rights in the depository float and were entitled to the float income. Fidelity did not breach any fiduciary duties with respect to the depository account." Finally, the panel vacates and remands for reconsideration an attorney fee award of $12,947,747.68.