ERISA Litigation Newsletter

On March 19, 2014, a panel of the Eighth Circuit Court of Appeals affirmed in part, vacated in part, reversed in part and remanded the district court’s decision in the first ERISA excessive fee case to go to a full trial on substantively all claims brought, in Tussey et al. v. ABB, Inc. et al.

Facts

Participants in two 401(k) plans sponsored by a single employer (collectively, the “Plan”), brought a putative class action on behalf of all Plan participants against the employer, individuals and entities related to the employer who had responsibility for the plan or its investments (collectively, the “Sponsor”), as well as the Plan’s trustee and recordkeeper, and the advisor to certain Plan investments (collectively, the “Provider”).  The complaint broadly challenged the recordkeeping and investment costs of the Plan.

After a 16-day bench trial, the district court made a number of factual findings and entered judgment against the defendants as to some, but not all, of the claims asserted by the participants.  Specifically, the trial court held that the Sponsor was liable for $13.4 million for allegedly excessive recordkeeping costs on the ground that the Sponsor breached fiduciary duties by, among other things, failing to monitor the costs, paying costs that exceeded the market rate and selecting share classes of investments for the menu that were more expensive than other available alternatives.  It also had held the Sponsor liable for an additional $21.8 million in damages in connection with the Sponsor’s decision in 2000 to remove a balanced fund from the Plan and map the assets to the Provider’s age-appropriate target-date funds, which the court held was the result of an insufficient fiduciary process.

The district court also held the Provider liable for its treatment of income earned on assets in the process of being transferred to, or redeemed from, Plan investment options (“float”), awarding the plaintiffs $1.7 million in damages.  The district court had held that float and float income were plan assets, and that the Provider failed to distribute “float income solely for the interests of the Plan.”

The trial court awarded attorneys’ fees of $12,947,747.68 and costs of $489,985.00, with the Sponsor and Provider jointly and severally liable.

Recordkeeping

On appeal, the Eighth Circuit panel agreed with the Sponsor that the manner in which Plan recordkeeping was paid, through revenue sharing and bundled service arrangements, was a “common and ‘acceptable’ investment industry practice[] that frequently inure[s] to the benefit of ERISA plans.”  Nonetheless, the court affirmed the judgment against the Sponsor for excessive recordkeeping costs given the trial court’s finding of facts that, among other things, the Sponsor made an insufficient investigation of those costs.

Investment Selection

The court next vacated the judgment against the Sponsor relating to the mapping of assets in the balanced fund to target-date funds, and remanded for further proceedings.  The court held that the trial court’s decision that the balanced fund outperformed the target-date funds after the mapping was infected by improper hindsight bias.  Further, the court held that the district court did not appear to have given the proper deference to the decision of the Sponsor, given that Plan provisions that reposed “sole and absolute discretion” on the Plan administrator to take actions with respect to the Plan and to construe its terms.  The circuit joined others that have held that such deference should be afforded even outside the benefits context, given the court’s “general hesitancy to interfere with the administration of a benefits plan,” and the fact that such deference furthers the balance struck in ERISA between competing interests of “ensuring fair and prompt enforcement of rights under a plan and the encouragement of the creation of such plans.”

The appellate court also provided guidance as to damages methodology that the district court should apply if it again found a breach of duty with respect to investment selection on remand.  Although the court left open the heavily litigated question as to whether an Investment Policy Statement (“IPS”) is a binding plan document, given that the IPS there required that the Plan fiduciary add an asset allocation fund, the court stated that any damages should not be measured by the performance of a target-date fund as compared to the now-removed balanced fund.  Second, if the trial court does award damages based on the mapping of one fund to another, it should not assume that all voluntary, post-mapping investments would have instead been made in the since-removed fund had that fund remained in the Plan.

Float

The court agreed with the Provider’s argument that, based on basic principles of property rights, float is not a plan asset.  With respect to Plan contributions, the court held that the Plan was credited with ownership of shares of the investment options on the day the contributions were received, and thereafter the Plan no longer had an ownership interest in the funds used to purchase those shares.  With respect to redemptions from the Plan investment options, the court found that participants adduced no evidence that the Plan owned the funds in the redemption account.  Accordingly, because the participants “failed to show that float was a Plan asset,” the judgment against the Provider was reversed.

Attorneys’ Fees

The court held that while the attorney’s rate used by the district court to establish a fee award was “generous,” it was not outside the district court’s discretion.  However, the court vacated and remanded the fee award given the decision to vacate and remand the investment selection claim.  It also ruled that the award could no longer be jointly and severally applied to the Provider, since the Provider could no longer be liable for any fees or costs given the reversal of the float judgment.

Goodwin Procter represented parties in this litigation.

In Tiblier v. Dlabal, No. 13-50344 (5th Cir. Feb. 28, 2014), the U.S. Court of Appeals for the Fifth Circuit ruled that an investment advisor for a plan could not be held liable under ERISA for losses the plan incurred from an investment, where the advisor did not act in a fiduciary capacity with respect to that investment.

Background

In Tiblier, trustees of an ERISA plan entered into a management agreement with an investment firm, CACH Capital Management, LLC (“CACH”), and its registered representative, Paul Dlabal (“Dlabal”).  The agreement granted CACH limited discretionary authority over the plan’s investments, and disclosed that Dlabal could be acting as a broker or dealer in connection with those investments.  CACH and Dlabal proposed several investments for the plan, some of which the trustees rejected.  One investment recommended by Dlabal to which the trustees agreed was the plan’s purchase of bonds issued by an energy company.  That investment resulted in Dlabal’s receipt of a commission.

After the energy company encountered financial difficulties and stopped paying interest on the bonds, the trustees brought suit in federal district court, asserting (among other things) that CACH and Dlabal had breached ERISA fiduciary duties in connection with the plan’s investment in the bonds.  Before suit was filed, CACH had become defunct, leaving Dlabal as the only defendant.  The district court granted Dlabal’s motion for summary judgment, ruling with respect to the ERISA claims that Dlabal could not be subject to fiduciary liability because he had provided the trustees with written disclosures describing the risks posed by investment in the energy company bonds.  The trustees appealed.

Appeals Court Decision

Before the Fifth Circuit, the trustees (supported by the Department of Labor, as amicus) argued that “Dlabal’s disclosures were insufficient to overcome ERISA’s strict fiduciary duties.”  However, the Court of Appeals determined that it did not need to address this “difficult question,” because it concluded that Dlabal did not act as an ERISA fiduciary with respect to the plan’s investment in the energy company bonds.  The court emphasized that the trustees could not prevail on their ERISA claims merely by demonstrating that Dlabal acted in “a general fiduciary capacity,” but instead were required to show that he had acted as a fiduciary “with regard to the specific transaction about which they complain.”  The court reviewed the functions set forth in the three clauses of ERISA’s definition of “fiduciary,” see 29 U.S.C. § 1002(21)(A), and found that Dlabal had not acted in that capacity with regard to the plan’s purchase of the bonds.

The first clause of ERISA’s fiduciary definition provides that a person is a fiduciary to the extent he “exercises” authority or control regarding management of a plan or its assets.  The Fifth Circuit concluded that Dlabal did not act as a fiduciary under this clause with respect to the bond purchase because the trustees “acknowledged that they, rather than Dlabal, made the ultimate decision” to buy the bonds.  The fact that the management agreement may have granted authority to Dlabal over plan assets in general was irrelevant, the court held, “because it is undisputed that Dlabal did not exercise that authority with respect to the only transaction at issue in this case.”

Under the second clause of ERISA’s fiduciary definition, a person is a fiduciary to the extent he renders investment advice to the plan for a fee or other compensation.  In this regard, the court noted that, while Dlabal did recommend that the plan purchase the bonds, the only compensation he received specifically in connection with that investment was a commission received from a third party.  The Fifth Circuit concluded that, under its precedent, see American Federation of Unions Local 102 Health and Welfare Fund v. Equitable Life Assurance Society, 841 F.2d 658 (5th Cir, 1988), a payment from a third party is not a “fee or other compensation” within the meaning of the second clause of ERISA fiduciary definition.  Therefore, the court found that Dlabal did not act as a fiduciary under that clause with respect to the bond purchase.

Lastly, the court noted that Dlabal could not have been acting as a fiduciary under the third clause of ERISA’s fiduciary definition – relating to plan administration – because it was undisputed that he played no part in the administration of the plan.

In Fuller v. SunTrust Banks, Inc., et al, No. 1:11-cv-00784-ODE (11th Cir. Feb. 26, 2014), the U.S. Court of Appeals for the Eleventh Circuit affirmed the dismissal of ERISA claims challenging the use of proprietary funds in a financial services company’s own retirement plan.

Background

In Fuller, a participant in a defined contribution plan sponsored by a bank brought putative class claims under ERISA against the plan sponsor, the benefits plan committee, and individuals who served on the committee and the sponsor’s compensation committee, alleging breaches of fiduciary duty and prohibited transactions in connection with the selection of bank-affiliated mutual funds for the plan.  Specifically, the plaintiff alleged that the defendants breached their fiduciary duties of prudence and loyalty by selecting and failing to remove bank-affiliated funds from the plan despite poor performance and higher fees than other viable options.  She further alleged that the defendants caused the plan to enter into transactions with the funds that were prohibited due to conflicts of interest.

District Court Decision

The U.S. District Court for the Northern District of Georgia granted in part and denied in part the defendants’ motion to dismiss the claims.  The district court dismissed the prohibited transaction claims as time-barred under ERISA’s statute of repose because the selection of the challenged funds occurred more than six years prior to the complaint.  The district court had held that the plaintiff’s breach of fiduciary duty claims were timely under the six-year period to the extent that she could show that the defendants breached ongoing fiduciary duties of monitoring and removing imprudent investments.  However, the court further held that, based on the record, the plaintiff had actual knowledge of the essential facts of her breach of fiduciary duty claim, and that ERISA’s three-year limitations period applied to bar such claims unless she could show that alleged violations occurred with the three year period prior to her complaint.

In light of these rulings, the defendants filed a further motion to dismiss on the ground that the plaintiff had taken a full distribution from her plan account more than three years prior to the filing of the complaint.  The district court granted the motion and dismissed the plaintiff’s remaining claims on the ground that she lacked standing to assert claims that had accrued within the three years prior to her complaint, during which time she did not hold any investment in the plan.  The plaintiff appealed.

Appeals Court Decision

On appeal, the Eleventh Circuit first considered the district court’s decision in the related case of Stargel v. SunTrust Banks, Inc., No. 1:12-CV-3822-ODE (N.D. Ga. Aug. 7, 2013), filed by different participants of the same plan, in which the district court reached a different conclusion regarding application of ERISA’s three- and six-year limitations periods.  In Stargel, the district court held, based on intervening decisions in David v. Alphin, 704 F.3d 327 (4th Cir.2013), reported in Goodwin Procter’s March 28, 2013 ERISA Litigation Update, and Tibble v. Edison International, 729 F.3d 1110 (9th Cir.2013), petition for cert. filed, (U.S. Oct. 30, 2013) (No. 13–550), also reported in the March 28 ELU, that the six-year limitations period barred the plaintiffs’ breach of fiduciary duty claims, which the court determined essentially challenged the initial selection of affiliated funds for the plan.  The Stargel court further held that ERISA’s three-year limitations period was not triggered under the facts as pleaded.

With this background, the Eleventh Circuit affirmed dismissal of the Fuller complaint, but on grounds different from the district court.  The appeals court held that ERISA’s three-year limitations period did not apply because the motion to dismiss record did not demonstrate that the plaintiff had actual knowledge of the breach.  However, the court further held that ERISA’s six-year repose period barred the plaintiff’s breach of fiduciary duty claims based on the alleged improper selection of funds for the plan.  The court further held that the plaintiff’s claim that the defendants breached duties by failing to remove the funds was identical to her claim with respect to initial selection of the funds, and, accordingly, were also time-barred.  In so ruling, the court observed that the defendants’ alleged failure to remove the funds was “simply a failure to remedy the initial breach” and not a separate violation.

In a concurring opinion, the Honorable J. Frederick Motz, U.S. District Judge for the District of Maryland, sitting by designation, concurred in the ruling but stated his belief that a claim for failure to remove a fund might be stated by a plaintiff who was not invested in the plan at the time of the initial selection.

In what appears to be the first class action addressing the Department of Labor’s (“DOL’s”) 2012 408(b)(2) disclosure regulations, the U.S. District Court for the Southern District of New York dismissed a case brought against Morgan Stanley for its revenue sharing arrangement with a platform provider, in Skin Pathology Associates, Inc. v. Morgan Stanley & Co., Inc. and ING Life Insurance and Annuity Co., No. 13-cv-3299-AT (S.D.N.Y. Feb. 24, 2014).

Background

A company that sponsored a 401(k) plan sued the broker (“Broker”) and the platform provider (“Provider”) that the plaintiff selected.  The plaintiff alleged that the Broker maintained a list of Alliance Partners, including some that paid compensation to the Broker based on the amount of plan assets record kept by the Alliance Partner through plans that were identified by the Broker.  The plaintiff alleged that the Broker performed no additional services for the payments it received from the Provider, who was one of the Broker’s Alliance Partners that paid it such compensation.

The plaintiff sued on behalf of itself and all other plan fiduciaries and participants who used the Broker and one of its Alliance Partners that paid the Broker with respect to plan assets invested through the Alliance Partner.  The plaintiff alleged that the Broker was a party in interest, as that term is defined in ERISA § 3(14).  The plaintiff did not allege that the Broker was a fiduciary.  But it nonetheless argued that the Broker could be liable for committing a prohibited transaction under ERISA § 406(a)(1)(C) by receiving compensation that was more than reasonable.  (The complaint contained additional counts against the Provider for breach of fiduciary duty, but those counts were voluntarily dismissed.)

District Court Decision

In addressing the prohibited transaction claim, the court first “suggest[ed] that ERISA § 406(a) was not designed to prohibit” the type of arrangement between the Broker and the Provider at issue, particularly given that other provisions of ERISA’s prohibited transaction rules specifically addressed payments from third parties, whereas ERISA § 406(a) did not.  Nonetheless, because the court believed that a transaction could be prohibited under ERISA § 406(a)(1)(C) even absent the use of plan assets, it found that it was “stuck between a rock and a hard place.”

The court found itself on “firmer ground,” however, when it analyzed the exemption contained in ERISA § 408(b)(2) for “making reasonable arrangements with a party in interest for . . . services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefor.”  The court held that the prohibited transaction claim could not be sustained if the exemption was met.  It relied on the provisions of the DOL’s Section 408(b)(2) fee disclosure regulation that requires covered service providers to disclose compensation paid among related parties.  Under those regulations, the court held, “[f]ee sharing arrangements . . . do not in-and-of themselves create a violation, but their non-disclosure does.”  Given that the complaint contained no allegation of non-disclosure, the court held that the exemption for reasonable compensation was satisfied, and it accordingly dismissed the case against the Broker.

Goodwin Procter’s March 18, 2014 Financial Services Alert analyzed the March 11, 2014 proposal by the Department of Labor (“DOL”) to require covered service providers of certain employee benefit plans to provide a guide to augment disclosures required under its 408(b)(2) disclosure regulation, if such disclosures are provided in lengthy or multiple documents.  Comments are due to the DOL by May 12, 2014.

Goodwin Procter CLE Webinar – “Supreme Court Hears Dudenhoeffer: Implications for Stock Drop and Other ERISA Fiduciary Litigation”
April 17, 2014
12:00 -1:00 pm EDT
Goodwin Procter partners Willy Jay, co-chair of the firm’s Appellate Litigation Practice, and Jamie Fleckner will discuss the Supreme Court’s consideration of the Dudenhoeffer case and its implications for ERISA fiduciary litigation, including for the cases highlighted in this newsletter.

Goodwin Procter partner Jamie Fleckner will speak at the following upcoming conferences:

SIFMA Compliance & Legal Society Annual Seminar
March 30 - April 2, 2014
Orlando, FL

ALI-CLE Investment Advisor Regulation 2014:  Institutional Advisory Legal and Compliance Forum
April 3, 2014
New York, NY

LIMRA 2014 Retirement Industry Conference 
April 10 - 11, 2014
Chicago, IL

Goodwin Procter partner Alison Douglass will speak at the following upcoming conferences:

DCIIA Public Policy Forum
April 3, 2014
Washington, D.C.