Wednesday, April 30, 2014

Tussey vs ABB Offers Both Clarity and Caution

In March of this year the 8th U.S. Circuit Court of Appeals in St. Louis handed down rulings in the case known as Tussey vs. ABB.  It was a case closely watched not just for its fiduciary implications for plan sponsors, but also for plan service providers.  In this case the service provider happened to be Fidelity Investments, which served as the investment provider and recordkeeper to the ABB plan.

ABB, Ltd., is a supplier of transmission and distribution equipment for the power industry.  This case centered on 401(k) plan fiduciary responsibility, alleged to have been abused by ABB and Fidelity Investments.  Specific allegations included ABB’s supposed failing to properly monitor recordkeeping fees, and selecting unnecessarily costly share class investments.  Recordkeeper Fidelity was alleged to have improperly retained float income associated with the funds used to purchase securities shares as plan investments.  The law firm representing the plaintiffs, Schlichter, Bogard & Denton, has been at the forefront of litigation against plan sponsors for alleged fiduciary failures. 
In the boxing world this one might be called a split decision.  The appeals court upheld a lower court decision that ABB, Ltd., was guilty of “failing to control recordkeeping costs,” and the court affirmed a $13.4 million award to plan participants.  ABB was judged to have failed in the area of due diligence, specifically by not “comparison shopping” or benchmarking the fees it paid Fidelity for recordkeeping.

The appeals court vacated, or set aside, the lower court’s judgment against ABB for its mapping of an investment option between fund families, and subsequent losses to participants who held that mapped investment.  This one will go back to the lower court for further litigation.
One element of the appeals court’s ruling is of particular interest to many retirement plan service providers.  That was its overturning the district court’s finding that Fidelity had improperly used plan assets by not allocating “float” income among the plan’s participants.  “Float” can be described as a sum used to purchase investment shares, held temporarily – for logistical reasons – until it can be paid to the chosen investment funds to purchase the shares requested.  This timeframe is commonly next-day.    

In a strategy that many would call prudent, Fidelity invested this float in secure investment vehicles that could earn interest during the very brief overnight float period.  Earnings, or “float interest,” was distributed broadly among all shareholders of the selected mutual funds, whether these shareholders were plan participants or simply private investors.  Fidelity did not retain the float interest for itself. 
The plaintiff’s attorney claimed that this float interest belonged to the plan, not broadly to all investors in these mutual funds.  The float interest was, plaintiff’s counsel claimed, a plan asset that Fidelity improperly distributed to investors other than plan participants.  Fidelity countered that the participants had been immediately credited with the shares they directed to be purchased, and were entitled to – and paid – any dividends or other gains associated with the shares purchased for them.  The “cash” used to purchase the shares, however, was no longer the property of the plan once the share purchase transaction was executed, Fidelity asserted.  The appeals court found that the plaintiffs were unsuccessful in rebutting Fidelity’s position on entitlement to float interest, and reversed the district court’s $1.7 million judgment against the firm. 

There may be multiple morals to this story, for plan sponsors, administrators and service providers alike.  Especially worth emphasizing is the importance of transparency and due diligence.  Knowing what is being paid for and what is being received, and knowing that amounts paid are “in the ballpark,” is crucial.  We get a sense from this and similar ERISA litigation that “reasonable” is a relatively flexible term in the eyes of the courts, as long as the terms of service and compensation are disclosed.