On remand, a district court weighing whether fiduciaries to a 401(k) plan abused their discretion when making an investment lineup change found they did, but since plaintiffs in the case failed to prove damages using the appropriate calculation, judgement was entered in favor of the fiduciaries.
The decision was made in the long-running case Tussey v. ABB in the 8th Circuit. The 8th U.S. Circuit Court of Appeals ruled that the district court’s opinion concerning the ABB PRISM plan’s switch from the Vanguard Wellington fund to the Fidelity Freedom target-date funds shows clear signs of hindsight influence regarding the market for target-date funds at the time of the redesign and the investment options’ subsequent performance. The court added that it could not be certain that the district court would have come to the same conclusion had it used the correct standard of deference to the fiduciaries in deciding whether the change was appropriate in relation to plan and investment policy statement (IPS) terms. The appellate court vacated the district court’s judgment and damages award and remanded for further consideration using the abuse of discretion standard set forth in Firestone Tire & Rubber Co. v. Bruch.
The U.S. District Court for the Western District of Missouri noted several procedural irregularities in the decision to switch funds, including:
- the strong performance of the Wellington Fund during the time period specifically identified in the IPS;
- ABB’s inconsistent explanations for removing the Wellington Fund and mapping its assets to the Freedom Funds;
- the fact that ABB took a substantial part of the PRISM plan’s assets and put them into an investment that was so new that ABB needed to make an exception to the IPS; and
- Fidelity’s explicit offer to give ABB a better deal if the Wellington assets were mapped into the Freedom Funds.
Given these irregularities, “the Court is confident that ABB was conflicted when it chose to take the Wellington Fund assets and put them into the Fidelity Freedom Funds,” the district court’s opinion says. “The Court believes that the ABB Defendants knew that removing the Wellington Fund and mapping its assets to the Freedom Funds would result in persistent increased revenues to Fidelity, which ultimately would benefit ABB.”
According to the court opinion, as a result of the fund switch, the PRISM plan sustained a loss because the Wellington Fund consistently outperformed the Freedom Funds after the mapping occurred.
However, the district court said the plaintiffs in the case failed to satisfy their burden of proof on the issue of damages. The 8th Circuit noted that the district court previously awarded damages in the amount participants who had invested in the Wellington fund would have had if ABB had not switched funds and the participants had remained in the Wellington fund for the entire period at issue. The appellate court determined that, in light of the IPS requirement to add a managed allocation fund, the damages would more accurately be measure by comparing the difference of the Freedom Funds and the minimum return of the subset of managed funds the ABB fiduciaries could have chosen.
Prior to making a decision, the district court had given both sides of the case an opportunity to make a new argument for damages, but they did not. The plaintiffs contended the 8th Circuit was wrong. They argued that the proper measure of damages would be the prudent alternative that provides the largest damages unless the breaching fiduciary sustains its burden of proof to establish a lower award is justified. However, the court noted they did not present what that figure would be.