Tussey v. Abb, Inc.

Decision Date20 May 2014
Docket Number12–3875.,Nos. 12–2056,12–2060,12–3794,s. 12–2056
CourtU.S. Court of Appeals — Eighth Circuit
PartiesRonald C. TUSSEY; Charles E. Fisher; Timothy Pinnell, Plaintiffs–Appellees v. ABB, INC.; John W. Cutler, Jr.; Pension Review Committee of ABB, Inc.; Pension & Thrift Management Group of ABB, Inc.; Employee Benefits Committee of ABB, Inc., Defendants–Appellants. Fidelity Management Trust Company; Fidelity Management & Research Company, Defendants. Securities Industry and Financial Markets Association, Amicus on Behalf of Appellants. AARP; Barbara Jean Black, Amici on Behalf of Appellees. Thomas E. Perez, Secretary of the United States Department of Labor, Amicus Curiae. Tamar Frankel; David Webber, Amici on Behalf of Appellees. Ronald C. Tussey; Charles E. Fisher; Timothy Pinnell, Plaintiffs–Appellees v. ABB, Inc.; John W. Cutler, Jr.; Pension Review Committee of ABB, Inc.; Pension & Thrift Management Group of ABB, Inc.; Employee Benefits Committee of ABB, Inc., Defendants. Fidelity Management Trust Company; Fidelity Management & Research Company, Defendants–Appellants. AARP; Barbara Jean Black; Tamar Frankel; David Webber, Amici on Behalf of Appellees. Ronald C. Tussey; Charles E. Fisher; Timothy Pinnell, Plaintiffs–Appellees v. ABB, Inc.; John W. Cutler, Jr.; Pension Review Committee of ABB, Inc.; Pension & Thrift Management Group of ABB, Inc.; Employee Benefits Committee of ABB, Inc., Defendants. Fidelity Management Trust Company; Fidelity Management & Research Company, Defendants–Appellants. AARP; Barbara Jean Black; Tamar Frankel; David Webber, Amici on Behalf of Appellees. Ronald C. Tussey; Charles E. Fisher; Timothy Pinnell, Plaintiffs–Appellees v. ABB, Inc.; John W. Cutler, Jr.; Pension Review Committee of ABB, Inc.; Pension & Thrift Management Group of ABB, Inc.; Employee Benefits Committee of ABB, Inc., Defendants–Appellants. Fidelity Management Trust Company; Fidelity Management & Research Company, Defendants. AARP, Amicus on Behalf of Appellees. Thomas E. Perez, Secretary of the United States Department of Labor, Amicus Curiae. Barbara Jean Black; Tamar Frankel; David Webber, Amici on Behalf of Appellees.

OPINION TEXT STARTS HERE

Jonathan D. Hacke, Washington, DC, Thomas E. Wack, argued, Saint Louis, MO (Jeffrey Scott Russell, Saint Louis, MO, Brian T. Ortelere, William J. Delany, Azeez Hayne, on the brief, Philadelphia, PA, for ABB in 12–2056 and 12–3875, Brian D. Boyle, Brianne Gorod, Kathryn E. Tarbert, Washington, DC, Richard N. Bein, on the brief, Kansas City, MO) for appellants Fidelity Management Trust Company; Fidelity Management & Research Company, for appellants in 12–2056 and 12–3875.

Jerome Joseph Schlichter, argued, Saint Louis, MO (Troy A. Doles, Heather Lea, Michael A. Wolff, on the brief, St. Louis, MO), for appellee.

David Ellis, argued, Washington, DC (Jay E. Sushelsky, Steven Gill Bradbury, Robert W. Helm, Andrew L. Oringer, Alexander R. Bilus, Ira D. Hammerman, Kevin Carroll, on the brief Washington, DC), for amicus curiae, the Secretary of Labor; amicus Securities Industry and Financial Markets Association in 12–2056 and 12–3875; (Barbara Jean Black, on the brief, Cincinnati, OH,) for Law Professors Frankel, Black, and Webber; (Melvin RadowitzJay E. Sushelsky, on the brief Washington, DC), for amicus of AARP.

Before RILEY, Chief Judge, BRIGHT and BYE, Circuit Judges.

RILEY, Chief Judge.

These consolidated appeals arise from a class action led by Ronald C. Tussey, Charles E. Fisher, and Timothy Pinnell (participants) as representatives of a class of current and former employees of ABB, Inc. (ABB) who participated in two ABB retirement plans 1 governed by the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et seq. After a sixteen-day bench trial, the district court entered judgment against the ABB defendants 2 and the Fidelity defendants 3 for breaching their fiduciary duties in violation of 29 U.S.C. §§ 1104, 1106, 1109. The ABB fiduciaries and Fidelity appeal the judgment, damages, and attorney fee award. Although the district court's analysis was sound in many respects, the analysis was not without errors. We affirm in part, reverse in part, and remand for further proceedings.

I. BACKGROUNDA. The Plan

To attract and retain quality employees, ABB sponsored the Plan, whose stated goal was “to encourage employees to provide additional security and income for their future through a systematic savings program.” See26 U.S.C. § 401(k) (authorizing defined contribution plans for the benefit of employees). Under the Plan, each participant decided how to allocate individual contributions among the investment options selected to be part of the Plan. ABB would match a portion of each contribution, up to six percent of the participant's salary. The Plan, which had an open architecture—meaning investment options came from several sources—generally invested in mutual funds, including Fidelity funds. As of 2000, the Plan held more than $1.4 billion in assets and had more than 14,000 participants.

B. Revenue Sharing

Fidelity became the recordkeeper for the Plan in 1995 after a competitive bidding process. Initially, ABB paid Fidelity a flat fee for each Plan participant. Beginning in 2000, Fidelity primarily was paid through revenue sharing—a common method of compensation whereby the mutual funds on a defined contribution plan pay a portion of investor fees to a third party. Fidelity received a percentage of the income the Plan investment options received from the participants. By 2001, compensation for the non-union Plan came solely from revenue sharing, whereas ABB paid Fidelity $8 per participant and some revenue sharing for the union Plan.

C. Other Corporate Services

Over time, Fidelity provided additional administrative services to ABB unrelated to the Plan, including processing ABB's payroll and acting as recordkeeper for ABB's defined benefit plans and health and welfare plans. Fidelity incurred losses from these additional services, but made substantial profits from the Plan. In 2005, ABB and Fidelity negotiated a comprehensive agreement covering both Fidelity's services to the Plan and the other corporate services Fidelity provided to ABB. During negotiations, Fidelity advised ABB that Fidelity provided services for ABB's health and welfare plans at below market cost and did not charge for administering other ABB plans. An outside consulting firm advised ABB it was overpaying for Plan recordkeeping services and cautioned that the revenue sharing Fidelity received under the Plan might have been subsidizing the other corporate services Fidelity provided to ABB. ABB did not act on the information it received.

D. Plan Redesign

In 2000, a year after Cutler became director of the PTMG, Cutler drafted and the PRC adopted an Investment Policy Statement (IPS), which was designed “to provide plan participants with a range of investment options that spanned the risk-return spectrum.” The IPS provided a framework for selecting, monitoring, and removing Plan investment options. The IPS contemplated investments in three tiers based on the Plan participants' willingness and ability to make personal asset allocation decisions. Cutler recommended that the Plan offer participants a life-cycle or target-date fund. Such managed allocation funds are dynamically managed to diversify a participant's portfolio across different funds and rebalanced to become more conservative as the participant nears a target retirement date. Cutler also suggested the PRC remove the Vanguard Wellington Fund, a balanced fund, from the investment platform as a result of “deteriorating performance and because participants would be empowered to create their own balanced fund.”

The PTMG considered three of the few target-date funds available at the time of the Plan redesign. Of the available funds, Cutler favored the Fidelity Freedom Funds because of their “glide path”—the manner in which the funds changed the asset allocation as the funds approached their respective target retirement dates. On the PTMG's recommendation, the PRC replaced the Wellington Fund with the Freedom Funds. The PRC decided to “map” funds held in the balanced Wellington Fund to the age appropriate Freedom Fund. Mapping creates a default option for participants who do not specify a different investment option when an existing option is being removed. Those participants who chose a different investment option did not have their funds mapped to the Freedom Funds.

E. Float

When a Plan participant or ABB made a contribution to the Plan, Fidelity processed the contribution to the Plan investment option designated by the participant and credited the participant's account with shares in that investment option based on the closing share price on the date of the contribution. The Plan became the owner of the selected investment option as of the date the contribution was made and the order was placed, entitling the Plan to any dividends or any other change in the fund that day. The contribution flowed into a depository account held at Deutsche Bank for the benefit of the Plan investment options. For logistical reasons, the contribution could not be distributed to the investment option until the next day. Money sitting in the depository account overnight before it is distributed to the Plan investment options is often described as “float.” 4

As is common practice for such accounts, Fidelity temporarily transferred the funds from the depository account overnight to secured investment vehicles to earn interest often called “float interest” or “float income.” The following day Fidelity transferred the principal back to the depository account. Fidelity used the float income to pay fees on float accounts before allocating the remaining income to each investment option choosing to receive it in proportion to the option's share of the overnight account balance. The float income...

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