Tussey v. ABB: Eighth Circuit Affirms, Reverses, and Vacates in Part, Holding That ERISA Fiduciaries Deserve Firestone Deference and Fidelity Not Liable for Retaining “Float” Income
On March 19, 2014, the Eighth Circuit Court of Appeals affirmed, reversed, and vacated in part the district court’s judgment in Tussey v. ABB Corp., which had held ABB Inc., its 401(k) plan committees, Fidelity Management Trust Co., and Fidelity Management Research Co. liable for violating ERISA in a suit challenging 401(k) plan fees.1 The Eighth Circuit’s decision recognizes that once a plan vests an ERISA fiduciary with discretion to construe the plan, the fiduciary’s interpretation is entitled to deference regardless of whether it concerns a benefits determination or other administrative matters, including investment selection. In light of that deference, the Eighth Circuit vacated the judgment against ABB arising from its purportedly imprudent fund selection and remanded the claim for further proceedings, while affirming a second judgment against ABB arising from alleged improper recordkeeping payments to Fidelity.2
The Eighth Circuit also addressed the intersection between “float” income and plan assets and held that Fidelity did not breach any fiduciary duties by retaining float income. The court then vacated the $1.7 million award of float damages against Fidelity and, because that was the only claim against Fidelity, vacated the district court’s finding of joint and several liability against Fidelity for attorneys’ fees under ERISA’s fee-shifting provision.3
Factual Background and Procedural History
Plaintiffs were employee participants in two 401(k) plans sponsored and administered by ABB and its fiduciary committees. ABB retained Fidelity to provide recordkeeping services and other corporate services unrelated to the plans. Fidelity was paid via revenue sharing, a practice whereby mutual funds pay a portion of their fees to the record-keeper.
Plaintiffs sued ABB and Fidelity on behalf of a class, claiming that the revenue sharing payments and other aspects of plan administration amounted to breaches of fiduciary duties. Following certification of the class and trial, the district court awarded a total of $36.9 million – $35.2 million against ABB and $1.7 million against Fidelity – plus $13.4 million in attorneys’ fees and costs, which were jointly and severally assessed against
The district court based its award on three alleged violations of ERISA. First, it awarded $13.4 million for ABB’s claimed failure to monitor and control the recordkeeping fees paid to Fidelity, despite notice that the fees allegedly were excessive and used to subsidize non-plan expenses. Second, the trial court awarded $21.8 million against ABB, holding that its decision to remove the Wellington Fund and add the Fidelity Freedom Funds to the plan’s investment options, and to map investments in the former to the latter absent another investment election, was imprudent. Third, the trial court awarded $1.7 million against Fidelity for its retention of “float” income earned on plan investment deposits and disbursements. Finally, based on those rulings and using its discretion under ERISA § 1132(g)(1), the trial court awarded $13.4 million in attorneys’ fees and costs to plaintiffs, assessed jointly and severally against all defendants.
The Appeal: Firestone Deference Is Not Limited to Benefits Determinations
On appeal, the Eighth Circuit began by noting that the district court did not identify a standard of review with respect to the district court’s review of the decisions of the plan administrator. Citing the Supreme Court’s decision in Firestone Tire & Rubber Co. v. Bruch,4 the Eighth Circuit recognized that where a plan document gives a plan administrator the discretion to interpret the plan, as the ABB plans did, the administrator’s exercise of that discretion is entitled to deference. Firestone deference requires a court to uphold an administrator’s interpretation so long as it is reasonable and not an abuse of discretion.5 The court rejected plaintiffs’ attempt to limit Firestone deference to benefits determinations (as opposed to other plan administration activities), in line with a majority of federal appellate courts.6
$13.4 Million Recordkeeping Judgment Against ABB Upheld
Notwithstanding the deferential standard of review, the Eighth Circuit upheld the recordkeeping judgment against ABB. First, the court distinguished earlier cases in which the Seventh and Third Circuits had held that the use of revenue sharing in conjunction with the selection of higher-fee funds did not violate ERISA where the fiduciaries offered a varied menu of funds with a range of fees.7 The court noted that those cases did not involve any “significant allegations of wrongdoing” akin to the allegations that “ABB used revenue sharing to benefit ABB and Fidelity at the Plan’s expense.”8 Second, the court found “ample support in the record” that ABB had failed to calculate recordkeeping fees paid to Fidelity, assess whether the fees were reasonable, negotiate lower fees, or prevent the use of fees to subsidize administrative costs unrelated to the plan.9 In light of this evidence, any failure by the district court to apply Firestone deference was deemed harmless. The court then upheld the $13.4 million award against ABB arising from the recordkeeping claim, holding that the district court had reasonably accepted expert testimony supporting the award.10
$21.8 Million Judgment on Investment Selection and Mapping Claim Against ABB Vacated
The standard of review had a greater impact on the remaining claim against ABB. The Eighth Circuit agreed with ABB that the district court had substituted its own interpretation of the plan and the plan’s Investment Policy Statement for the fiduciaries’ interpretation, while improperly relying on hindsight to assess the prudence of the investment selection.11 The court vacated the $21.8 million damage award and remanded that claim for further proceedings consistent with Firestone deference.12
A Divided Panel Holds Fidelity Not Liable for Retaining Float Income
In reversing the judgment against Fidelity, the Eighth Circuit held that Fidelity was entitled to retain depository float interest (which accrues after Fidelity receives participant contributions, but before those funds are moved from Fidelity’s depository account to plan investment options the following day) because it was not a plan asset.13 As a matter of “basic property rights,” the plan could not assert ownership of depository account funds (or float interest on the funds) because it had already received a property interest in the investment shares purchased with those funds.14 The Eighth Circuit further held that Fidelity was not liable for retaining redemption float (which accrues after a participant requests disbursement of his plan account holdings by check and before the check is cashed) because the plaintiffs had agreed that the funder of the check owns the checking account funds (and float) until the check is cashed.15
A dissent argued that Fidelity had breached its fiduciary duty of loyalty by retaining float income for its benefit and by using it to pay plan expenses without openly negotiating to do so.
Attorneys’ Fees and Costs Award Vacated
In light of its other decisions, the Eighth Circuit vacated the district court’s award of $13.4 million in attorneys’ fees and costs and directed the district court to reconsider the fee award on remand. The court declined to vacate the “generous” hourly rate the district court had used, but directed it to apply that rate to any award on remand “only to work that requires an attorney – not administrative, clerical, or paralegal work.”16
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1 Nos. No. 12-2056, 12-2060, 12-3794, 12-3875, Slip Op. (8th Cir. Mar. 19, 2014).
2 Slip Op. 23.
3 Id. at 22-23.
4 Firestone, 489 U.S. 101, 111 (1989); accord Conkright v. Frommert, 559 U.S. 506, 509 (2010); Sunder v. U.S. Bancorp Pens. Plan, 586 F.3d 593, 602 (8th Cir. 2009).
5 Firestone, 489 U.S. at 111.
6 Tussey, Slip op. at 12-13 fn. 6 (citing the 3d, 6th, 7th, and 9th Circuits as following a similar rule; citing the 2d Circuit as reaching a contrary conclusion).
7 Slip op. at 14, distinguishing Hecker v. Deere, 556 F.3d 575 (7th Cir. 2009), Loomis v. Exelon Corp., 658 F.3d 667 (7th Cir. 2011), and Renfro v. Unisys Corp., 671 F.3d 314, 327 (3d Cir. 2011).
9 Id. at 15.
10 Id. at 15-17.
11 Id. at 18.
12 Id. at 20.
13 Id. at 20-21.
15 Id. at 21-22.
16 Id. at 22-23.
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