Judgment Reduced, but the Importance of Monitoring Plan Investments Reaffirmed

On March 19, 2014, the Eighth Circuit Court of Appeals upheld one of the first excessive fee rulings in favor of retirement plan participants. Two years ago, in Tussey v. ABB, Inc., et al., No. 06-4305 (Mar. 31, 2012), a federal district court in Missouri awarded plan participants $36.9 million against a 401(k) plan sponsor (ABB, Inc.) and third-party administrator, which was the plan’s recordkeeper. The third-party administrator was compensated through revenue sharing, the procedure by which the mutual funds held by the plan paid a portion of their fees to the third-party administrator.

On appeal, the Eighth Circuit Court of Appeals reduced the damages award to $13.4 million by upholding only the portion of the district court’s judgment that was related to excessive fees. In doing so, the Eighth Circuit held that the mutual funds, and not the plan, were properly entitled to the “float” on plan contributions. (“Float” is the interest and income earned on assets between the time contributions are deposited and the time investment orders are placed, or between the time disbursements are requested and when they are paid to participants or beneficiaries.) The court further held that the plan fiduciaries had not breached their duty to plan participants in the selection of plan investment options. The court also sided with the majority of the other circuit courts of appeal (including the Ninth, Seventh, Sixth, and Third Circuits) in holding that when plan fiduciaries are granted discretionary authority to administer a qualified retirement plan, the grant of discretion extends to selecting the plan’s investment options. Because ABB had acted prudently and exercised reasonable diligence when the investment options were selected, the fiduciaries could not be held liable for the actual investment results. Of the circuit courts to have considered this issue, only the Second Circuit has failed to extend the discretionary authority standard beyond claims for plan benefits.

The Eighth Circuit, however, upheld the district court’s decision that ABB had failed to properly monitor the fees paid to the third-party administrator from the plan investments. ABB had engaged a consultant to monitor the selection of the plan’s investment funds, but had failed to take the consultant’s advice warning that the third-party administrator’s fees were excessive.

Finally, the Eighth Circuit remanded the issue of attorneys’ fees to the district court for consideration in light of the appellate court’s decision.

The Tussey decision is important to plan sponsors for several reasons. It reinforces the importance of exercising due diligence and prudence in the selection of plan investment options. (Anyone can select profitable investments in hindsight.) So long as the proper consideration is given to the investment selection process, plan fiduciaries should not be liable for the results. Of course, the selection process must still be properly documented. Furthermore, the selection of plan investments should always be monitored on an ongoing basis by a third party. Finally, the plan document should provide broad discretionary authority to plan fiduciaries in all aspects of plan administration.