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.
