The parties in one of the oldest excessive fee suits have finally come to terms.
Those parties – Tussey v. ABB – settled for $55 million which, if approved by a federal judge, would bring to conclusion litigation that was filed in 2005 by Schlichter Bogard & Denton.
The suit had alleged that ABB offered participants a menu of options for investing the money in their accounts, noting 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 lifecycle funds. He opted for the Fidelity Freedom Funds and suggested removing the Vanguard Wellington Fund, although 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.
Suit ‘Cased’
In January 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.
Damage ‘Says’
The calculation of damages in this case has been a long-standing issue as it has bounced its way up to the U.S. Supreme Court and back. After a 2012 trial, the district court awarded the participant-plaintiffs $21.8 million plus attorneys’ fees of $12.9 million – a judgment 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 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 district court had previously 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 a float claim, plus attorneys’ 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, 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.”
The U.S. Supreme Court denied review of the case in 2014 and 2017.
Settlement Terms
As for the $55 million settlement, it breaks down as follows:
- $18,331,500 – plaintiffs’ attorneys (a third of the total settlement)
- $2,510,000 – litigation costs and expenses incurred by the plaintiffs’ attorneys
- $25,000 – for Ronald Tussey, the named plaintiff, above and beyond his recovery as a plan participant
The settlement goes beyond mere money, of course. It also calls for:
- Within 18 months from the judgment order, ABB, Inc. will utilize a competitive bidding process, including a request for proposal, to select a new recordkeeper. Fidelity Trust is allowed to take part in this process.
- If revenue sharing is used to pay for recordkeeping, ABB agrees to determine the dollar amount the plans are paying the recordkeeper and will leverage the plan’s size to negotiate for rebates.
- So long as ABB serves as fiduciary to the plans, ABB agrees not to use the plan recordkeeper to provide any corporate services to ABB.
- ABB agrees to choose the share class of investments that has the lowest expense ratio, and to “manage the Plans for the exclusive benefit of the Plans’ participants and beneficiaries.”
As for the rest of the monetary settlement, it includes every ABB worker who participated in the 401(k) plan on or after Dec. 29, 2000 (excluding the “ABB Defendants and any individual who served on a Committee identified as an ABB Defendant”) – some 12,500 individuals, according to an earlier filing.
The case is Tussey et al. v. ABB Inc., case number 2:06-cv-04305, in the U.S. District Court for the Western District of Missouri.
