The appeals court majority opinion “seems like a loose argument at best,” said Martin Schmidt, principal and client services director at HS2 Solutions Inc., Chicago, a retirement plan and technology consulting firm.
Mr. Schmidt said he counsels clients to carefully monitor float income costs. “I tell clients to make sure there is disclosure,” he said.
Although Fidelity prevailed on appeal, the next legal step could be complicated because the float issue is only one portion of the complex Tussey vs. ABB case.
By 3-0 votes, appellate court judges also:
nupheld the District Court judge's ruling that ABB Inc., Cary, N.C., had breached its fiduciary duties. Among other things, ABB “failed to monitor record-keeping costs (and) failed to negotiate rebates for the plan from either Fidelity or other investment companies chosen to be on the plan platform,” the ruling stated. The U.S. District Court judge in Jefferson City, Mo., awarded $13.4 million to plaintiffs on March 31, 2012.
nvacated the lower court's ruling against ABB that had awarded plaintiffs $21.8 million based on the mapping of one investment, Vanguard's Wellington Fund, in the two ABB 401(k) plans to another investment, Fidelity Freedom Funds. The District Court judge said $21.8 million was the amount lost by participants due to mapping. The appellate court sent this case back to the District Court “for further consideration,” saying the $21.8 million “is speculative.”
Fidelity wasn't a defendant in the rulings about record-keeping costs or investment mapping. However, all three decisions are inextricably linked. Due to the complexity of the appellate decision, legal experts and DC plan consultants have predicted the case may be reheard “en banc” — by all 11 judges of the 8th Circuit — or even appealed to the U.S. Supreme Court.
In fact, lawyers for ABB and for the plaintiffs recently petitioned the appeals court to rehear the case. Their petitions don't describe the substance of the appeals; briefs are expected to be filed by April 16.
Several DC consultants credited the Tussey v. ABB lawsuit and Department of Labor fee-disclosure regulations, enacted in mid-2012, for having prompted DC plan executives to improve their understanding of float income.
“The float was one of those unknowns because sponsors weren't sure how it was factored into overall fees,” said Ross Bremen, a partner in investment consulting firm NEPC LLC, Boston. “There were always questions.”
The District Court decision and the enactment of fee-disclosure rules have led to “far fewer questions about float income practices and created greater transparency,” he said. “The case brought these (float income) practices to light.”
Mr. Bremen said record keepers have been changing their float income practices, even before the 2012 District Court ruling in Tussey vs. ABB. “Most record keepers over the years credited the float to the plans that generated the dollars,” he said. “Many use non-interest-bearing accounts ... so they avoid having to reallocate the dollars.”
In the name of greater transparency, the firms making these changes have a common goal, Mr. Bremen said: “No record keeper wants to be a defendant in the next ABB-style case.”
Since the Tussey vs. ABB suit was filed in 2006, record keepers have been “very diligent in documenting float income to make sure it is a sponsor-directed decision rather than a decision that gives discretion to a record keeper,” said Robyn Credico, the Arlington, Va.-based defined contribution practice leader for consultant Towers Watson & Co.
“Prior to the suit, some record keepers would allocate float back to participants' accounts at their own discretion,” she said. “After the suit was filed in 2006, record keepers allocated float back under the direction of the sponsor so that they were not performing a fiduciary act.”