In the long-running litigation involving the ABB, Inc. 401(k) Plan (the Plan) – the complaint was filed in 2006 – and following the second appeal, in Tussey v. ABB, Inc. (ABB II), No. 15-2792, 2017 WL 929202 (8th Cir. Mar. 9, 2017), the Eighth Circuit has now remanded the case yet again, telling the district court to reconsider its finding of no losses to the Plan. While the appellate court affirmed the district court's ruling that the ABB fiduciaries acted disloyally when they decided to replace the Vanguard Wellington Fund with the Fidelity Freedom Funds, the Eighth Circuit directed the lower court to reconsider the appropriate measure of damages.   

The decision is notable for a number of reasons and serves as an important reminder of issues for which fiduciaries may be taken to task by the courts. While a prudent process is critical and fiduciaries may enjoy deferential treatment of their investment decisions, those protections may only go as far as a challenge to the fiduciary's prudence. Where the fiduciary’s loyalty is at issue, there is "no place for deference."¹  And the Eighth Circuit suggested that an otherwise prudent process would not shield a fiduciary decision if it were reached for an "improper motive," a decision made "not because [the fiduciaries] thought it was best for the plans, but because they wanted to get a better deal for [the company]" – even if an objective fiduciary might have made the same decision.²  

Summary of Underlying Facts

The salient facts in the case centered on the ABB fiduciary committee's decision to add a life-cycle or target-date fund in accordance with the Plan's Investment Policy Statement (IPS) which required the fiduciaries to provide a range of investment options within a broad risk-return spectrum. The committee considered three target-date funds and ultimately selected the Fidelity Freedom Funds to replace the Vanguard Wellington Fund, and "mapped" those funds into the appropriate Freedom Fund. Participants could reallocate out of the Freedom Fund at any time.  

The plaintiffs claimed that the fiduciaries’ choice of the Freedom Funds was disloyal because they imposed higher fees on the 401(k) plan participants. The higher fees allowed the company to retain Fidelity to provide services to ABB's health and welfare and defined benefit plans for little or no cost. In essence, the plaintiffs contended that the fees Fidelity charged to the 401(k) plan participants subsidized the services Fidelity provided to the other plans, benefitting ABB and Fidelity.  

The Trial and First Appeal

After a 16-day bench trial, the district court found that the fiduciaries breached their ERISA duties and that the Plan suffered losses, including $21.8 million in connection with the Wellington and Freedom Fund switch. In the first appeal, the Eighth Circuit remanded the case to the lower court on two grounds: 1) the district court should have afforded more deference to the committee's decision to switch the Wellington Fund for the Freedom Funds, and 2) the district court "should reevaluate" the damages calculation, which compared the performance of the Freedom Funds to the Wellington Fund had the funds not been swapped, as it was "speculative and exceeds losses to the plan resulting from any fiduciary breach."³   

On remand, the district court, applying a deferential standard of review, nevertheless ruled that the committee's decision concerning the Wellington Fund and Freedom Funds was disloyal to the Plan and favored Fidelity and ABB. With respect to damages, the lower court dropped its damages award from $21.8 million to zero, finding the Plan suffered no losses. This time, the court's measure of loss was based on a statement in the earlier Eighth Circuit decision that "[i]t seems the participants' mapping damages, if any, would be more accurately measured by comparing the difference between the performance of the Freedom Funds and the minimum return of the [target-date funds] the ABB fiduciaries could have chosen without breaching their fiduciary obligations."⁴ Not unreasonably, the district court applied this as a "tacitly approved" measure of loss and, finding that the Freedom Funds would have provided a greater return than the worst performing alternative that the fiduciaries could have selected consistent with their duties, ruled the plaintiffs had not established losses.⁵   

The Second Appeal

Both parties appealed again.  In the second appeal, the fiduciaries could take some heart from the Eighth Circuit's decision. The appellate court did not retreat from its earlier acknowledgement that bundled services and revenue sharing practices are "common and 'acceptable' investment industry practices that frequently inure to the benefit of ERISA plans."⁶ The appellate court confirmed that fiduciary investment decisions are entitled to deference and should be upheld as long as they are reasonable. In addition, the court appeared to agree that the ABB fiduciaries had engaged in a prudent process in selecting the Freedom Funds. But, in the end, these principles could not overcome the fiduciaries' disloyal conduct and improper motives, and the court ruled that they breached their fiduciary duties, affirming the district court’s finding of liability.  

The damages component of the ruling, however, required yet another remand. According to the Eighth Circuit, the statement in its earlier decision of what "seems" to be an accurate way to measure damages was not, as the district court believed, "tacit approval" of that measure, or, as the defendants advocated, a "binding alternative holding" or "law of the case."⁷ Rather, said the Eighth Circuit, it merely "proposed an alternative" which the district court was not required to follow.⁸  Remanding the case, the Eighth Circuit instructed the trial court to consider different ways of measuring losses, hinting that perhaps the initial damages calculation was not so off-base after all. The appellate court cited to Donovan v. Bierwirth, a precedential Second Circuit decision from 1985, often relied upon by plaintiffs and the Department of Labor for the principle that "[w]here several alternative investment strategies were plausible, the court should presume that the funds would have been used in the most profitable of these."⁹ Further, addressing an argument put forward by the ABB fiduciaries, the Eighth Circuit commented that "it is a mistake to argue . . . that measuring any portion of losses by comparing the returns from the Freedom Funds with what the plans would have earned from the Wellington Fund is necessarily inappropriate" because "the point of the comparison here would just be to determine, as a factual matter, the effect of owning one fund rather than the other."¹⁰   

Lessons Learned

The parties now head back to the district court to re-engage in battle over damages, but the case provides some constructive lessons learned given the epic nature of the litigation.  

Deference for Investment Decisions. The case confirms the importance of ensuring that the plan document grants discretion to the fiduciaries to interpret its terms. The Eighth Circuit saw no compelling reason to limit Firestone deference to benefit claims. As long as the plan document grants the fiduciaries discretion to interpret the plan, reviewing their interpretation is subject to deference and upheld if reasonable.      

Prudent Process. A prudent process for fiduciary decision-making remains critical, but may not shield fiduciaries who make decisions, in part, from conflicting motives. In ABB, the issue was not so much the decision to remove the Wellington Fund, but the decision to select the Freedom Funds.

Investigating and Monitoring Recordkeeping Fees. In ABB, the fiduciaries were found to have breached their duties to the Plan because they failed to "diligently [] investigate Fidelity and monitor Plan recordkeeping costs":

• They failed to calculate the amount the Plan paid Fidelity for recordkeeping through revenue sharing;
• They failed to review whether Fidelity's pricing was competitive;
• They failed to negotiate for a lower fee – with a plan the size of ABB's, the court found that the fiduciaries could have leveraged the Plan’s size to reduce fees; and
• They failed to "make a good faith effort to prevent the subsidization of administration costs of ABB corporate services" even after ABB's own consultants determined that the Plan was overpaying Fidelity. 

While the Eighth Circuit stopped short of requiring fiduciaries to engage in a request for proposal process as part of the duty to monitor recordkeeping costs, plan fiduciaries in general should be careful to avoid the mistakes made by the ABB fiduciaries.

Investment Policy Statement. The Eighth Circuit did not address the issue of whether an IPS qualifies as a "plan document," a position taken by the plaintiffs and the Department of Labor. Nevertheless, both it and the district court evaluated the fiduciaries' conduct with respect to the terms of the IPS, which signifies the importance of the IPS in general. Plans are not required by ERISA to adopt an IPS, and if a decision is made to draft an IPS, the drafting should be done with care to provide fiduciaries the flexibility they need to exercise their discretion.

For more information, please contact:

Theresa (Tess) S. Gee, tgee@milchev.com, 202-626-5928

Michael N. Khalil*

Nicholas P. Wamsley*

*Former Miller & Chevalier attorney

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¹ ABB II, No. 15-2792, 2017 WL 929202, at *4 (8th Cir. Mar. 9, 2017).
²Id. at *3.
³Tussey v. ABB, Inc. (ABB I), 746 F.3d 327, 338 (8th Cir. 2014).
⁴ Id. at 339.
⁵Tussey v. ABB, Inc., No. 2:06-cv-04305-NKL, 2015 WL 4159983, at *11 (W.D. Mo. July 9, 2015).
⁶ ABB I, 746 F.3d at 336.
⁷ ABB II, No. 15-2792, 2017 WL 929202, at *4.
⁸Id. at *5.
⁹ Id. (citing Donovan v. Bierwirth, 754 F.2d 1049 (2d Cir. 1985)).
¹⁰Id. at *6.
¹¹ ABB I, 746 F.3d at 336 (citing Tussey v. ABB, Inc., No. 2:06-cv-04305-NKL, 2015 WL 4159983 (W.D. Mo. July 9, 2015)).

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