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Northwest OH Legal Blog

Tuesday, April 29, 2014

United States Court of Appeals Affirms District Court Ruling against Plan Fiduciaries

In a federal appellate court case that underscores the duty of plan fiduciaries to monitor service provider fees, a three-judge panel sitting in the United States Court of Appeals for the Eighth Circuit has affirmed a federal district court’s decision holding the plan administrator of an employer-sponsored 401(k) plan liable for failing to monitor the plan’s excessive recordkeeping fees.  The appellate court, however, vacated the district court’s $21.8 million judgment against the plan administrator on class action claims by plan participants challenging the plan’s investment options and the “mapping” of plan assets from Vanguard to Fidelity Management Trust Company (“Fidelity”).
 
The Eighth Circuit’s decision in Tussey v. ABB, Inc., No. 12-2056 (8th Cir. March 19, 2014) has four major components: 
  • plan interpretation by the plan administrator,
  • selection of plan investments by plan fiduciaries,
  • monitoring of service provider fees, and
  • “float income.”
Plan Interpretation.  The Eighth Circuit held that when a plan document grants the plan administrator discretion to interpret and construe the plan’s terms, courts must defer to the plan administrator’s interpretation of the plan so long as the plan administrator’s interpretation is reasonable.  Thus, the federal district court erred when it failed to grant any deference to the plan administrator’s determinations on matters that fell beyond the scope of benefit claims.  In reaching this conclusion, the Eighth Circuit rejected the participants’ claim that such deference should be limited to benefit claim determinations, and that courts should review other, non-benefit determinations de novo.  Instead, the Eighth Circuit joined the Ninth, Seventh, Sixth, Third, and Second Circuits in giving deference to the determinations of plan administrators on matters outside the scope of benefit claims.
Selection of Plan Investment Options.  The Eighth Circuit vacated the district court’s $21.8 million judgment against the plan administrator on the class action claims of plan participants who had challenged the plan’s fiduciaries on their investment option selections and the “mapping” of plan assets from Vanguard to Fidelity.  In 2000, the plan’s fiduciaries decided to remove the Vanguard Wellington Fund (“Wellington Fund”) as an investment option and replace it with Fidelity Freedom Funds (“Freedom Funds”).  The fiduciaries accommodated those participants whose account balances included money in the Wellington Fund and who had not specified an alternate investment for their balances by mapping funds held in the Wellington Fund to the age-appropriate Freedom Funds.  Between 2000 and 2008, the Wellington Fund outperformed the Freedom Funds.  Based on this performance disparity, the lower court found that the plan’s fiduciaries had breached their duty to the participants by substituting the Freedom Funds for the Wellington Fund.
On appeal, the Eighth Circuit ruled that the reasonableness of the plan’s investment choices must be determined on the basis of what the fiduciaries knew at the time the investment options were selected, and not the options’ subsequent performance.  Because it was unclear from the record whether the district court had afforded appropriate deference to the plan administrator’s interpretation of the plan document with respect to the selection of the plan’s investment options, the Court of Appeals vacated the $21.8 judgment on the participants’ class action claims and remanded the claims for further consideration by the district court.
Monitoring of Service Provider Fees.  The district court had ruled that the plan fiduciaries violated their fiduciary duty “when they agreed to pay Fidelity an amount that exceeded market costs for [p]lan [recordkeeping] services in order to subsidize the [other] corporate services provided to [the plan sponsor] by Fidelity, such as [the plan sponsor’s] payroll and recordkeeping for [the plan sponsor’s] health and welfare plan and its defined benefit plan.”  Based on this breach of fiduciary duty, the district court awarded the participants $13.4 million in damages. 
On appeal, the plan fiduciaries argued that the district court’s finding on this point was in error because the district court had implied that certain business arrangements, such as the 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 finding.  Relying on the record, the Eight Circuit ruled that the fiduciaries’ failure to take any action or make any investigation of Fidelity’s recordkeeping fees after two key events—after Fidelity had informed the fiduciaries that Fidelity was providing other services to the plan administrator for free or at below market cost and after an outside consulting firm had advised the fiduciaries that Fidelity was overcharging the plan for recordkeeping fees—adequately supported the district court’s finding.
Float Income.  The Eight Circuit panel was divided on the issue of so-called “float income,” with two of the judges voting to reverse the district court’s $1.7 million judgment against Fidelity’s generation of interest on plan contributions and disbursements held temporarily in overnight accounts—so-called “float” income—and Fidelity’s failure to remit this interest to the plan.  The question before the panel was whether Fidelity’s use and treatment of the float—its failure to distribute the float and float interest to the plan itself instead of the investment options—violated Fidelity’s fiduciary duty of loyalty to the plan under the Employee Retirement Income Security Act of 1974 (“ERISA”).
Resolution of this question turned on whether float is a “plan asset” under ERISA.  Although ERISA does not exhaustively define the term “plan assets,” the United States Secretary of Labor has repeatedly defined the term “plan assets” in accordance with ordinary notions of property rights.  In Tussey, the participants failed to adduce any evidence that the plan had any property rights in the float or float income.  On the contrary, the record showed that when a contribution was made, Fidelity credited the participant’s separate account, and the plan became the owner of the shares of the selected investment option—typically shares of a mutual fund—the same day the contribution was received.  The plan received the full benefit of ownership—including any capital gains or dividends from the purchased shares—as of the purchase date. The participants failed to rebut Fidelity’s assertion that once the plan became the owner of the shares, the plan was no longer also the owner of the money used to purchase the shares, which flowed to the investment options through the depository account held for their benefit.  Based on the record, the majority concluded that the plan’s investment options—as opposed to the plan—held the property rights in the depository float and that the investment options were entitled to the float income.  Accordingly, since neither the float nor the float income was a plan asset under ERISA, Fidelity could not have breached its ERISA fiduciary duty to the plan for its handling of float and float income.
Key Takeaways.  Although the Eighth Circuit upheld the $13.4 million judgment against the fiduciaries for their failure to adequately monitor recordkeeping fees, several elements of the Tussey opinion are supportive of a broader view of the discretion granted to plan administrators in interpreting the plan document.  The opinion supports the notion that the plan administrator’s discretion in interpreting the plan document goes beyond benefit claims, extending to areas such as the selection of plan investment options in a 401(k) plan.  The opinion also serves as a warning to plan fiduciaries, however, that hiring a market leader, such as Fidelity, in the plan recordkeeping business is not sufficient in itself to discharge their fiduciary duties.  Fiduciaries must scrutinize the actions of even reputable service providers and investigate information tending to show that the plan is being overcharged for professional services.

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