Fidelity Wins Some in Appeal of Tussey Case

Fidelity was able to convince an appellate court to vacate some of the decisions made against it in the widely watched case of Tussey v. ABB, Inc.

While the 8th U.S. Circuit Court of Appeals agreed with a district court finding that the ABB fiduciaries breached their duties to the plan by failing to diligently investigate Fidelity and monitor plan recordkeeping costs, it agreed with Fidelity and ABB that the district court relied on hindsight in its ruling that the switch from the Vanguard Wellington fund to Fidelity Freedom funds violated their fiduciary duties under the Employee Retirement Income Security Act (ERISA). Fidelity was also found not liable for breaches concerning its use of “float” income.

In affirming the district court’s ruling that ABB breached its duties by failing to monitor recordkeeping costs (see “Upfront: Breach of Duty”), the 8th Circuit noted that the district court did not condemn bundling services or revenue-sharing, which are common and “acceptable” investment industry practices that frequently inure to the benefit of ERISA plans. Rather, 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 district court’s factual findings find ample support in the record, and its legal conclusion that the ABB fiduciaries breached their fiduciary duties to the Plan was not in error,” the appellate court wrote in its opinion.

The 8th Circuit also disagreed with ABB fiduciaries’ argument that there is no basis for the district court’s award of $13.4 million in excessive recordkeeping fees because the award rested on the unreliable testimony of the participants’ expert, Al Otto, noting that the district court ruled on Otto’s reliability.

However, the 8th Circuit agreed that the district court’s opinion concerning the switch from the Vanguard Wellington fund to the Fidelity Freedom target-date funds shows clear signs of hindsight influence regarding the market for target-date funds at the time of the redesign and the investment options’ subsequent performance. “While it is easy to pick an investment option in retrospect…, selecting an investment beforehand is difficult. The Plan administrator deserves discretion to the extent its ex ante investment choices were reasonable given what it knew at the time,” the 8th Circuit said.

The court added that it could not be certain that the district court would have come to the same conclusion had it used the correct standard of deference to the fiduciaries in deciding whether the change was appropriate in relation to plan and investment policy statement terms. The 8th Circuit vacated the district court’s judgment and award on this claim and remanded for further consideration. “On remand, the district court should reevaluate its method of calculating the damage award, if any, for the participants’ investment selection and mapping claims,” it said.

Concerning float income earned on assets waiting to be invested or redeemed, the appellate court found Fidelity’s assertion that it “was not required to credit the Plan with income earned on overnight investments of float” because “[f]loat was not a Plan asset” within the meaning of ERISA persuasive. The court said the participants failed to adduce any evidence the plan had any property rights in the float or float income. The court ruled Fidelity did not breach any fiduciary duties with respect to the depository account or redemption account.

Since the 8th Circuit found differently than the district court on some claims, it vacated the more than $13 million award against Fidelity and ABB for attorneys’ fees and costs for further consideration. “We leave for the district court to determine the amount by which the attorney fee award against the ABB fiduciaries should be reduced after resolving the remaining issues on remand,” the appellate court said.

The 8th Circuit’s opinion in Tussey v. ABB, Inc. is here.