United States: Reviewing Fiduciary Investment Decisions - Tussey v. ABB

Last Updated: April 21 2014
Article by James B. Bristol

Revenue Sharing - Investment Policy Statements. The 2012 Tussey vs. ABB Inc. decision garnered headlines and provided fodder for seminars on ERISA fiduciary liability as it was the first reported decision to tag rank and file employees with huge ERISA fiduciary liability. The case involved two 401(k) profit sharing plans maintained by ABB Inc. with $1.4 billion in assets and 14,000 employees. Based on ERISA fiduciary breaches, the court awarded damages of $35 million against the plans' investment committee, $1.7 million against Fidelity Investments for retaining "float" income on trust investments, and more than $13 million in legal fees. The bulk of this award was rendered against ABB employees who were responsible for day to day 401(k) plan administration. For more background, see our bulletin  here and our blog here.

Breach of Fiduciary Duties. In the trial, the district judge ruled that the investment committee had acted imprudently and breached its fiduciary duties:

  1. The committee did not know what fees the plan was paying through revenue sharing. It was unaware of normal market rates for such services.
  2. The committee ignored the requirements of its investment policy statement in selecting investment funds.

In so ruling, the district court evaluated the conduct of the plan fiduciaries based on its interpretation of the law. Their judgments were given no deferences.

Deferential Standard of Fiduciary Review. The Eighth Circuit Court of Appeals disagreed with this approach and has adopted a deferential standard for reviewing fiduciary conduct in plan administration. Other circuits have, so far, limited deferential review to claims for benefits. Under the court's new standard, if a fiduciary's decisions are reasonable based on what the fiduciary could have known at the time, they are to be upheld, even if the judge might have reached a different conclusion. The court announced it was joining "most" of the appellate courts that have addressed this issue. Presumably, there are still federal circuits that will give no deference to these kinds of fiduciary decisions.

The victory may be short-lived. The court did not approve the conduct of the investment committee but returned or "remanded" the case to the trial judge to re-evaluate the facts under this deferential standard of review. The investment committee could still be liable if the district judge finds that the committee acted unreasonably in the way it selected investments or monitored plan expenses.

Plan Assets – Trustee Float Income. Fidelity received $1.7 million in "float income" over the period being reviewed based on overnight investment of cash paid by the plan to purchase mutual fund shares. The shares would be credited to the plan on one day but there was usually a lag between the purchase and the transaction clearing date. Fidelity simply invested the cash in a short-term or "overnight" investment and earned income on the cash until the trade was cleared with the investment fund. The court ruled that this cash was not an asset of the ABB plans and that Fidelity was permitted to retain the float income.

What A Fiduciary Should Do Now

Although the fiduciaries may have gained temporary or partial relief, an investment committee must demonstrate that it acted reasonably in discharging its obligations. Going forward, fiduciaries should:

  • Ensure that the plan documents expressly grant full discretionary authority to the retirement plan committee (or similar body) in all actions regarding the investment and administration of the plan. The deferential standard of review will not apply unless the plan includes the "magic" language.
  • Review and revise the investment policy statement to eliminate detailed procedures and hard-wired triggers. Fiduciary conduct appears more reasonable if it is not contrary to the investment policy statement.
  • Learn how revenue sharing and fees paid by the plan are used to pay for services. Due to recent ERISA regulations, this information is provided annually to plan fiduciaries.
  • Select an independent investment advisor who specializes in the retirement plan market and has the expertise to stay abreast of a complex and evolving      market.
  • It might be unreasonable to rely solely on investment information given by fund managers and affiliated third-party administrators who have a proprietary interest in the funds selected for the plan.
  • Periodically benchmark expenses. Fiduciaries should know how their plan compares to the marketplace. A full-scale RFP is not needed or advisable for this purpose.
  • Obtain specific ERISA indemnification from your employer through an indemnity agreement or board action. This may take some effort and legal assistance. ERISA fiduciary insurance may also be desirable.

For further information visit Waller's ERISA Exchange blog

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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