The last decade witnessed something of a "boom" in so-called "stock drop" class-action suits brought under the Employee Retirement Income Security Act.
In the typical stock-drop case, the plaintiffs alleged that plan fiduciaries breached duties of prudence and due care by failing to remove allegedly inappropriate stock - often sponsor stock - as an investment alternative when the fiduciaries knew of facts that rendered the stock a poor investment choice.
The number of stock-drop cases spiked dramatically in the wake of the high-profile Tyco and Enron scandals, but recent data shows these suits falling quickly out of vogue. According to data released by Cornerstone Research, only 15 stock-drop cases were filed in each of 2010 and 2011, and only six were filed through August 2012. That represents a significant drop-off from the peak years of 2005 through 2008. The downward trend is undeniable, and reflects a variety of factors and decisions that have limited the success of such claims. While this is good news for ERISA fiduciaries, no one should expect ERISA class-actions to fade gradually into extinction.
Instead, a recent $36.9 million judgment from the United States District Court for the Western District of Missouri, Tussey v. ABB, Inc. (No. 2:06-cv-04305-NKL, 2010 U.S. Dist. LEXIS 45240 (W.D. Mo. Mar. 31, 2012)), may prompt class litigation to shift along a different frontier, one in which claims focus not on the selection and performance of plan investments, but rather on the execution and implementation of stated plan practices and objectives, including payment of third-party service fees that now must be disclosed pursuant to newly effective Department of Labor regulations.
Excessive-fee cases like Tussey have been percolating in various forms for several years. Indeed, Tussey itself was one of more than 15 similar cases filed by the same St. Louis law firm in 2006, but it represents the first case of its kind decided on its merits. Not only did the plaintiffs hit pay dirt with a massive judgment, the Court also issued a detailed opinion that holds fiduciaries accountable both for monitoring service fees and for carefully complying with statements made in governing plan documents. In light of that result, the plaintiffs' class-action bar surely will be on the lookout for opportunities to repeat the Tussey success.
The Tussey facts
The basic backdrop of the Tussey case should sound familiar to ERISA professionals. ABB, Inc., an international power supply and automation company with nearly 150,000 employees, sponsored two 401(k) defined contribution plans regulated by ERISA: one for its collectively bargained workforce and one for its non-collectively bargained employees. Both plans included mutual funds offered by Fidelity Investments. The investment adviser for these mutual funds was Fidelity Management and Research Company, and the recordkeeper for the plans was Fidelity Management Trust Company.
Fidelity Trust initially charged the plans for its recordkeeping services on a per-participant basis, but eventually changed to revenue-sharing, a typical industry practice by which certain percentages of plan assets were transferred to the plan recordkeeper by the companies whose products were offered in the plans.
As the Tussey Court conceded, this type of arrangement is common, and reliance on revenue sharing to pay recordkeeping fees does not alone breach any fiduciary duties. So how did it land the ABB fiduciaries in hot water? The problem, according to the Court, was a lack of careful execution and attention to detail.
The Tussey failures
In the first part of its decision, the Court chastised the plan fiduciaries for their dual failure (i) to monitor the amount, and the reasonableness of the fees actually paid to the recordkeeper, and (ii) to take meaningful action in furtherance of the revenue sharing objectives articulated in ABB's Investment Policy Statement.
The Court zeroed in on the fact that the ABB fiduciaries took no action to learn the actual amount of fees being paid to the plan recordkeeper on a per-participant basis, but instead relied on the various funds' overall expense ratios. ABB also neglected to obtain any cost benchmark against which to evaluate recordkeeping fees, either at the point when ABB entered into the revenue sharing arrangement or even after a consultant warned that ABB might be paying excessive fees. The Court also took exception with ABB's failure to leverage the enormous size of its plan holdings to achieve lower expenses.
While the Court found the lack of oversight problematic, the language of ABB's Investment Policy Statement sealed the fiduciaries' fate. The Investment Policy Statement specifically provided that revenue sharing would be used to offset or reduce the cost of providing administrative services to plan participants. Based on expert testimony introduced by the plaintiffs, the Court concluded that the opposite was true - that the unchecked revenue sharing practices resulted in the payment of a significantly higher per-participant fee.
The Court next found that the potential for increased revenue sharing payments led ABB to replace a Vanguard fund with a Fidelity fund, and otherwise to select or retain more costly classes of investments in plan offerings when less expensive options were readily obtainable. Further, the Court again found that the fiduciaries breached their duties by failing to follow the investment selection processes and considerations contained in ABB's Investment Policy Statement and other governing plan documents.
The Court also noted that ABB's own consultant advised that revenue sharing payments on the 401(k) plans apparently subsidized other services provided by Fidelity, including recordkeeping for the company's DB plan, its deferred compensation plan, its health benefits, and its payroll. Despite awareness of this arrangement, ABB took no corrective action and, as a result, the Court concluded that ABB's negotiation of revenue sharing arrangements was motivated by a desire to save money on fees for these other corporate services, when the ABB fiduciaries should have taken good-faith measures to minimize the costs born by the 401(k) plans.
The Tussey lessons
Regardless of how the parties fare on appeal, it is striking that the first excessive-fee class action to reach a trial on the merits resulted in a $36.9 million plaintiffs' verdict and a decision highly critical of ERISA fiduciaries. Even more telling, however, is the Tussey Court's fact-intensive analysis of the particular manner in which the ABB fiduciaries failed to exercise their day-to-day management and oversight duties with care and loyalty. In so doing, the Court repeatedly hoisted ABB by the petard of its own plan documents, finding multiple breaches of fiduciary duty occasioned by failures to follow the procedures and policies stated in those governing documents. This may prove fertile ground for future class claims.
The small-scale lessons to be learned from Tussey are obvious. When it comes to revenue sharing, plan fiduciaries must - at a minimum - engage in a careful evaluation of fees actually being paid to service providers, periodically revisit the fee structure, and carefully document the steps taken to determine the reasonableness of fees. In this regard, the Department of Labor's revised Section 408(b)(2) fee disclosure rules, which took effect this summer, will likely prove helpful to fiduciaries, but also informative to potential plaintiffs. The regulations now require service providers and plans to provide clear statements of fees paid for specific services, including indirect fee arrangements, and to identify any potential conflicts of interest, thereby theoretically obviating the ignorance problem that befell the ABB fiduciaries. Of course, these clear statements also will allow little excuse for paying any fees later determined to be unreasonable.
On a more general level, the plaintiffs' success in Tussey may propel a new wave of ERISA class action litigation focusing on the manner in which fiduciaries discharge their responsibilities, particularly in reference to a plan's governing documents. Any procedural misstep or action out of sync with plan documents may prove perilous. To safeguard against these types of claims, ERISA fiduciaries should critically examine plan documents - the Investment Policy Statement in particular - to ensure that those documents are up to date, consistent with industry best practices, reflective of the changing regulatory environment, and not so narrow as to unnecessarily constrain fiduciaries from discharging their duties in a commercially practical manner.
Moreover, fiduciaries must make certain that their execution of plan functions does not waver from the prescripts of those documents.
Houlihan is co-chair of Edward Wildman Palmer's commercial litigation practice group. Vernazza is an associate at Edward Wildman Palmer.
