Plan fiduciaries who lost a long-standing excessive fee case, but weren’t forced to pay damages, aren’t out of the woods just yet.
After a 2012 trial, the district court in the case of Tussey v. ABB awarded the participant-plaintiffs $21.8 million plus attorneys’ fees of $12.9 million. That judgment was subsequently vacated in part by the 8th Circuit in 2014; on remand, the district court held that the fiduciaries, despite being liable for breaching their duties, didn’t have to pay for the damages caused.
However, upon appeal from that U.S. District Court for the Western District of Missouri – Jefferson City, the 8th Circuit has once again considered the case (Tussey v. ABB, Inc., 2017 BL 73968, 8th Cir., No. 15-2792, 3/9/17), and determined that the lower court “mistook” its direction to “reevaluate” how the participants might have been injured for a “definitive ruling on how to measure plan losses, and as a result entered judgment in favor of the ABB fiduciaries despite finding they did breach their duties.”
The Original Case
Setting the stage, the appellate court noted that the plans in question offered participants a menu of options for investing the money in their accounts, and that the plan’s investment policy statement said the plans would offer investments in three “tiers,” organized by how much active involvement they demanded from investors, including one that offered several “managed allocation” funds. John Cutler, Jr., the director of the committee’s staff, thought those “managed allocation” funds should be “target-date” or “life-cycle” funds, and he opted for the Fidelity Freedom Funds. According to the court, he also suggested removing the Vanguard Wellington Fund, though that raised the question of what to do with the money participants had invested in it — roughly $123 million (8.4% of the total assets in the plans).
The ABB fiduciaries decided to map this money into the Freedom Funds, though participants whose money was mapped to a Freedom Fund remained free to choose a different investment option (or options) at any time.
In 2006, the participants sued the ABB fiduciaries and two Fidelity companies: the recordkeeper for the plans and the investment advisor for the Fidelity mutual funds included in the plans. After a bench trial, the district court found both sets of defendants “breached some fiduciary duties.” In particular, the court found the ABB fiduciaries breached their fiduciary duties by:
- deciding effectively to replace the Wellington Fund with the Freedom Funds based on self-interest rather than what was best for the plans;
- failing to properly monitor and control recordkeeping costs; and
- agreeing to make the plans overpay for Fidelity’s services in return for Fidelity charging ABB less for corporate services it bought for itself.
The Fidelity defendants were liable as well, according to the district court, because interest earned when money in the process of being added to or taken out of plan investments was invested overnight — called “float income” — should have been credited to the plans, not back to the investments. The district court awarded the participants $21.8 million against the ABB fiduciaries for swapping the Wellington and Freedom Funds, $13.4 million for the ABB fiduciaries’ other breaches, and $1.7 million against the Fidelity defendants on the float claim, plus attorney fees of $12.9 million from all the defendants jointly and severally. (Fidelity would eventually be cleared of liability by the appellate court.)
The defendants appealed, and the appellate court vacated the finding of breach for changing the investment options, explaining the district court should have afforded more deference to the discretion the plans explicitly granted the ABB fiduciaries, and going so far as to caution that “the original award for switching the funds was ‘speculative’ and exceed[ed] the ‘losses to the plan[s] resulting from’ any fiduciary breach.”
Given another opportunity to consider the issues, the district court again held the ABB fiduciaries breached their fiduciary duties, but concluded the participants had failed to prove any losses under the theory the appellate court “tacitly approved” in the first appeal. Consequently, the district court reduced the participants’ attorney fee award for work through trial by almost $2.2 million, to $10,768,474. The district court also awarded the participants $900,000 for work on the appeal, which the appellate judges noted was just over two-thirds of what they requested — for a total of $11,668,474.
At which point the participants appealed the district court’s ruling on measuring losses and liability for the breach, and — in a consolidated cross-appeal — the ABB fiduciaries argued that both parts of the fee award were still too high.
The appellate court noted that “…strong evidence supported the district court’s finding, notably the fact that Cutler — the director of the Pension Review Committee’s staff — and ABB’s director of employee benefits openly communicated with Fidelity about the “pricing implications” of changes to the plans’ investment lineup and the specific dollar amounts by which Fidelity would cut its fees “if the Wellington money map[ped]/default[ed] to the Freedom Funds.” It dismissed the arguments of the defendants, and embraced the sense of the district court that “there [were] too many coincidences to make the beneficial outcome for ABB serendipitous, particularly considering the powerful draw of self-interest when transactions are occurring out of sight and are unlikely to ever be discovered.”
Now, as for the matter of the damages associated with that breach, the appellate court went to some trouble to clarify that in its remand, it hadn’t intended that the district court take its comments quite so literally. Rather, despite the pains the appellate court went to in describing what it saw as shortcomings in the approach, in this ruling it now stated clearly that “on remand, the district court should reevaluate its method of calculating the damage award, if any, for the participants’ investment selection and mapping claims.”
The appellate court now stated that it nonetheless had issues with a comparison between what an investment in the Wellington Fund would have provided and that of the target date funds in the absence of evidence that the participants in that former option would have retained it. “A reasonable inference is one which may be drawn from the evidence without resort to speculation,” it said, and that “as calculated, the $21.8 million damage award for the participants’ mapping claim is speculative and exceeds the losses to the plan resulting from any fiduciary breach.”
It went on to “…leave to the district court’s discretion whether and how to expand the record and hear additional argument from the parties on this issue.”
Ultimately, the appellate court held that the district court “did not err in deciding that the ABB fiduciaries abused their discretion and breached their fiduciary duties by acting on improper motives when they replaced the Wellington Fund with the Freedom Funds as investment options for the plans.” However, it went on to note that the district court should have decided for itself how to measure what the plans lost as a result, “rather than considering itself bound by our prior comments on the issue,” leaving that for the lower court to decide upon, and that therefore “the judgment in favor of the ABB fiduciaries is at best premature,” going on to vacate the judgment, the award of attorney fees and costs, and remanding it for further proceedings.