Bugielski v. AT&T Servs., Inc.

• Docket Number: 21-56196
• Decision Date: 04 August 2023
• Citation: 76 F.4th 894
• Parties: Robert J. BUGIELSKI; Chad S. Simecek, individually as participants in the AT and T Retirement Savings Plan and as a representatives of all persons similarly situated, Plaintiffs-Appellants, v. AT&T SERVICES, INC.; AT&T Benefit Plan Investment Committee, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

76 F.4th 894

Robert J. BUGIELSKI; Chad S. Simecek, individually as participants in the AT and
T Retirement Savings Plan and as a representatives of all persons similarly situated, Plaintiffs-Appellants,
v.
AT&T SERVICES, INC.; AT&T Benefit Plan Investment Committee, Defendants-Appellees.

No. 21-56196

United States Court of Appeals, Ninth Circuit

Argued and Submitted October 17, 2022 Portland, Oregon
Filed August 4, 2023

76 F.4th 897

Appeal from the United States District Court for the Central District of California, Virginia A. Phillips, Chief District Judge, Presiding, D.C. No. 2:17-cv-08106-VAP-RAO

John J. Nestico (argued), Schneider Wallace Cottrell Konecky LLP, Charlotte, North Carolina; Todd M. Schneider and James A. Bloom, Schneider Wallace Cottrell Konecky LLP, Emeryville, California; Todd S. Collins and Ellen T. Noteware, Berger Montague PC, Philadelphia, Pennsylvania; Jason H. Kim, Schneider Wallace Cottrell Konecky LLP, Los Angeles, California; Eric Lechtzin, Edelson Lechtzin LLP, Newtown, Pennsylvania; Shoham J. Solouki, Solouki Savoy LLP, Los Angeles, California; for Plaintiffs-Appellants.

Ashley E. Johnson (argued), Paulette Miniter, and Katie R. Talley, Gibson Dunn & Crutcher LLP, Dallas, Texas; Nancy G. Ross, Mayer Brown LLP, Chicago, Illinois; for Defendants-Appellees.

Before: Richard A. Paez and Bridget S. Bade, Circuit Judges, and Raner C. Collins,^* District Judge.

OPINION

BADE, Circuit Judge:

The Employee Retirement Income Security Act of 1974 ("ERISA") establishes standards for employee benefit plans to protect the interests of plan participants. See 29 U.S.C. § 1001. To that end, ERISA imposes a duty of prudence upon those who manage employee retirement plans, prohibits plans from engaging in transactions that could harm participants' interests, and mandates disclosures to the United States Department of Labor.

Robert Bugielski and Chad Simecek ("Plaintiffs") are former AT&T employees who contributed to AT&T's retirement plan ("the Plan"), a defined contribution plan. They brought this class action against the Plan's administrator, AT&T Services, Inc., and the committee responsible for some of the Plan's investment-related duties, the AT&T Benefit Plan Investment Committee (collectively, "AT&T"). Plaintiffs allege that AT&T failed to investigate and evaluate all the compensation that the Plan's recordkeeper, Fidelity Workplace Services ("Fidelity"), received in connection with that role. Plaintiffs argue that (1) AT&T's failure to consider this compensation rendered its contract with Fidelity a "prohibited transaction" under ERISA § 406, (2) AT&T breached its duty of prudence by failing to consider this compensation, and (3) AT&T improperly failed to disclose this compensation to the Department of Labor.

The district court granted summary judgment in AT&T's favor. It concluded that Plaintiffs' prohibited-transaction and duty-of-prudence claims failed because AT&T had no obligation to consider this compensation. It also concluded that AT&T was not required to disclose this compensation on its reports to the Department of Labor.

Because we conclude that AT&T was required to consider this compensation and

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report a portion of it, we affirm in part, reverse in part, and remand for further proceedings.

I A

Fidelity has served as the Plan's recordkeeper since 2005. As recordkeeper, Fidelity performs various administrative functions, such as enrolling new participants in the Plan, maintaining participants' accounts, and processing participants' contributions to the Plan. In exchange for these services, Fidelity charges the Plan a flat fee for each participant. Fidelity also offers other services to participants on an as-needed basis, including administering loans and processing withdrawals. Fees for these transactions are charged directly to the Plan participant requesting the service.

In approximately 2012, AT&T amended its contract with Fidelity to provide Plan participants with access to Fidelity's brokerage account platform, BrokerageLink. For a fee, BrokerageLink allows participants to invest in mutual funds not otherwise available through the Plan. These fees are based on a brokerage commission schedule that Fidelity provides to participants. For example, a participant might pay a $75 fee to purchase shares of a particular fund.

In addition to the fees it receives from participants, Fidelity receives "revenue-sharing fees" from the mutual funds available through BrokerageLink. For example, if a participant invested in a mutual fund offered through BrokerageLink, the fund would pay Fidelity a percentage of the amount the participant invested. Participants have invested billions of dollars in these mutual funds, resulting in millions of dollars in revenue-sharing fees for Fidelity.

In 2014, AT&T contracted with Financial Engines Advisors, L.L.C. ("Financial Engines"), to provide optional investment advisory services to Plan participants. For an asset-based fee, Financial Engines would manage a participant's investments.¹

However, to do so, Financial Engines needed access to participants' accounts. Accordingly, AT&T amended its contract with Fidelity to provide Financial Engines with this access. And in its contract with Financial Engines, AT&T authorized Financial Engines to contract directly with Fidelity to secure the requisite access. Financial Engines and Fidelity then entered into a separate agreement under which Fidelity received a portion of the fees Financial Engines earned from managing participants' investments. The compensation Fidelity received from Financial Engines was significant; in some years, Fidelity received approximately half of the total fees that Financial Engines charged participants, resulting in millions of dollars in compensation for Fidelity.

B

In their third amended complaint, Plaintiffs allege that AT&T violated several ERISA provisions by failing to consider the significant compensation that Fidelity received through BrokerageLink and Financial Engines.

Plaintiffs first allege that AT&T's amendment of its contract with Fidelity to incorporate the services of BrokerageLink and Financial Engines was a prohibited transaction under § 406(a)(1)(C). See 29

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U.S.C. § 1106. Section 406 "prohibits fiduciaries from involving the plan and its assets in certain kinds of business deals," Lockheed Corp. v. Spink, 517 U.S. 882, 888, 116 S.Ct. 1783, 135 L.Ed.2d 153 (1996), and § 406(a)(1)(C) specifically prohibits the "furnishing of goods, services, or facilities" between a plan and a "party in interest," 29 U.S.C. § 1106(a)(1)(C).

Although ERISA § 408 exempts certain transactions from § 406's reach, Plaintiffs argue that none of those exemptions applies to the transaction between AT&T and Fidelity. Specifically, Plaintiffs argue that this transaction was not exempt under § 408(b)(2), which exempts from § 406's bar service contracts or arrangements between a plan and a "party in interest" if (1) the contract or arrangement is reasonable, (2) the services are necessary for the establishment or operation of the plan, and (3) no more than reasonable compensation is paid for the services. 29 U.S.C. § 1108(b)(2); 29 C.F.R. § 2550.408b-2(a). For the contract or arrangement to be "reasonable," the party in interest must disclose to the plan's fiduciary all compensation the party expects to receive "in connection with" the services provided pursuant to the contract or arrangement.² 29 U.S.C. § 1108(b)(2)(B), 29 C.F.R. § 2550.408b-2(c)(1)(iv); see also Reasonable Contract or Arrangement Under Section 408(b)(2)—Fee Disclosure, 77 Fed. Reg. 5632-01 (Feb. 3, 2012). Plaintiffs argue that AT&T's amendment of the contract with Fidelity to incorporate Financial Engines's and BrokerageLink's services did not satisfy the requirements of § 408(b)(2) because AT&T failed to obtain the requisite disclosures of the compensation Fidelity received from these service providers or determine that such compensation was "reasonable." 29 U.S.C. § 1108(b)(2); 29 C.F.R. § 2550.408b-2(a).

Plaintiffs also allege that AT&T violated § 404 and its duty to act prudently by failing to consider this compensation. See 29 U.S.C. § 1104. Section 404 imposes a duty of prudence upon fiduciaries, requiring them to discharge their duties "with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims." Id. § 1104(a)(1)(B).

Finally, Plaintiffs allege that AT&T was required to include this compensation on its annual report, the "Form 5500." ERISA requires a plan's administrator to file an annual report with the Department of Labor. See id. § 1023. Subject to some exceptions, plan administrators are generally required to identify in the report any people or entities that received compensation for providing services to the plan, as well as the amount of compensation received. Id. § 1023(c)(3); Revision of Annual Information Return/Reports, 72 Fed. Reg. 64731-01, 64739 (Nov. 16, 2007). Plaintiffs allege that AT&T did not satisfy this obligation.

C

The district court granted summary judgment in AT&T's favor. The court addressed the § 404 duty-of-prudence claim first, rejecting Plaintiffs' argument that a prudent fiduciary would have considered the compensation Fidelity received from Financial Engines and BrokerageLink. The court adopted the reasoning of another district court in Marshall v. Northrop

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Grumman Corp., No. 2:16-cv-06794, 2019 WL 4058583, at *11 (C.D. Cal. Aug. 14, 2019), and concluded that Plaintiffs' argument "fails as a matter of law" because this sort of third-party compensation "exists independent of the Plan and stems from an agreement to which the Plan is not a party," so AT&T is not required to consider it.

The district court next rejected Plaintiffs' § 406 prohibited-transaction claim, concluding that...