A federal appeals court on Wednesday issued a split decision in a prominent 401(k) case involving claims by participants that a sponsor, ABB Ltd., Cary, N.C., and its record keeper, Fidelity Investments, breached their fiduciary duties.
The decision by the 8th U.S. Circuit Court of Appeals in St. Louis upheld a district-court judgment of $13.4 million to be awarded to the 401(k) participants that said ABB had violated its fiduciary duties by “failing to control record-keeping costs,” according to the decision issued Wednesday.
A federal district court in Kansas City, Mo., ruled against ABB and Fidelity in March 2012; both appealed. The original lawsuit was filed in December 2006, and is known as Tussey vs. ABB.
However, the appeals court vacated another judgment by the district court ordering ABB to pay $21.8 million, based on what the district court said was the financial loss due to mapping one investment, Vanguard's Wellington Fund, in the ABB 401(k) plan to another investment, Fidelity's Freedom Funds, according to Wednesday's decision. “The district court's opinion shows clear signs of hindsight influence,” the appeals court said. The size of the 401(k) plan could not be learned by press time.
The appeals court remanded this claim back to the district court “for further consideration,” saying that the $21.8 million “is speculative.” The appeals court also said the district court should “re-evaluate its method of calculating the damage award, if any, for the participants' investment selection and mapping claims.”
Barry Dillon, a spokesman for ABB, declined to comment on the ruling.
Jerome Schlichter, an attorney for the plaintiffs, said he was pleased that the appeals court agreed that ABB had breached its fiduciary duty “by allowing excessive record keeping fees.” Mr. Schlichter is the founding and managing partner for the law firm of Schlichter, Bogard & Denton.
The record-keeping ruling “sends a message that fiduciaries have to carefully monitor all fees in a plan,” he said.
The appeals court also reversed a $1.7 million judgment ordered by the district court against Fidelity. The district court had ruled that Fidelity has breached its fiduciary duties through its management of float income — money earned from interest-bearing accounts, used temporarily by 401(k) plans before plan assets are disbursed when participants move assets among investment options.
Plaintiffs had argued that Fidelity failed to pay float income to the 401(k) plan, but Fidelity argued that float income wasn't a plan asset within the terms of the Employee Retirement Income Security Act.
“Because the participants have failed to show the float was a plan asset under the circumstances of the case, the district court erred in finding Fidelity breached its fiduciary duty,” the appeals court ruling stated.
“We are pleased with the decision today by the court of appeals,” Vincent Loporchio, a Fidelity spokesman wrote in an e-mail. “Fidelity's actions were in all respects consistent with our fiduciary duties to our clients and all legal requirements. With this decision on appeal, Fidelity has prevailed on all claims asserted against it in this case.
Mr. Schlichter said he “strongly disagreed” with the appeals court ruling on float income. He said he will wait until the federal district court reconsiders the mapping issue before he responds to the float-income ruling by the appeals court.
In addition, the appeals court vacated the awarding of attorneys' fees and costs amounting to a total of about $13.5 million against ABB and Fidelity. The appeals court sent the issue of costs and fees back to the district court. The reversal of the judgment against Fidelity means the firm “can no longer be liable for attorney fees and costs,” the appeals court ruling said.
The three-judge panel ruled unanimously on the record keeping, mapping and attorneys' fees issues. One judge dissented on the Fidelity float income issue.