Tussey vs ABB Offers Both Clarity and Caution

In March of this year the 8^th 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.    

EBSA’s New Disclosure Guidance: Questions as Much as Answers

On March 12th, the Department of Labor’s Employee Benefits Security Administration (EBSA) proposed new guidance intended to make it easier for retirement plan fiduciaries to understand information about the services provided to their plans, and the fees paid for them.  Whether or not EBSA’s proposal will become a mandate remains to be seen.  But what IS clear is that the retirement plan community is sitting up and taking notice, and beginning to assess just how challenging it might be to comply if this proposal becomes a requirement.

This latest proposed guidance would amend the previously issued EBSA final fee disclosure regulations, the purpose of which is to assist fiduciaries in prudently selecting and monitoring service providers to their ERISA-governed plans, and to ensure that service arrangements are reasonable.  To accomplish this, detailed information on services and accompanying costs must be disclosed by a covered service provider, or CSP.  A CSP is any entity that expects to receive at least $1,000 in direct or indirect compensation for services – such as advisory, fiduciary, recordkeeping, etc. – to a plan.

The final regulations permit service providers to use multiple documents, such as a collection of contracts, client agreements, memoranda, etc., to disclose services and fees.  The final regulations did not define how such documents were to be organized, or specify that there must be a table of contents, or other guide, to help fiduciaries find the service and fee information.  There was, however, a “sample” guide that service providers could elect to use to help fiduciaries find the required information.  Perhaps that should have been our clue.

Now enter EBSA’s new proposed amendment to these final regulations.  If a single, relatively simple document provides all of the needed service and fee information, all would be well, and no additional documentation would be needed.  But, if a CSP provided service and expense information in a lengthy document, or in multiple documents, this new EBSA amendment would require furnishing a separate guide to help the fiduciary find the required information.

When would this separate guide be needed, and how detailed must it be? It is on these questions that the difficulty of complying will turn.  If multiple documents are used to satisfy the CSP’s fee disclosures, the guide proposed in this amendment would require identifying each document, and within it, each required item of information.  Section or page numbers would be required to narrow down the location of disclosure information within the document or documents. 

As one might imagine, this prescription has generated questions.  Such as, what is “quick?”  What is “easy?”  What is “lengthy?”  And a big one: “who will decide?”  There is legitimate concern that if a guide must have specificity down to the page number, or to the paragraph, it could be extremely costly for a CSP to create custom guides for the many plans it may serve.

Part of our due diligence is to objectively assess the impacts this guidance could have; not just on our compliance practices, our service agreements, or our own bottom line, but also on the costs that will have to be – and many would say should legitimately be – passed on to plans and their participants. 

It must be remembered that this guidance is a proposed amendment, but at the same time it does reflect EBSA thinking.  It is likely to be modified, or reasonably implemented, only if our legitimate objections – should we have them – are vigorously presented and argued.

Will EBSA’s desired ends justify the means?  How simple must we make it for fiduciaries to assess their service provider relationships?  As we judge the pluses and minuses of this proposed amendment, what is the proper balance between perfection and its price tag?  Good questions; so far without answers.