EBIA Weekly Newsletter

Eighth Circuit Sends Fund-Mapping Case Back to Trial Court to Redetermine Damages

   March 16, 2017

Tussey v. ABB, 2017 WL 929202 (8th Cir. 2017)

Available at http://media.ca8.uscourts.gov/opndir/17/03/152792P.pdf

The Eighth Circuit has weighed in again on the fund-mapping portion of this long-running case. In its previous decision, the Eighth Circuit rejected the trial court’s determination that the fiduciaries of two 401(k) plans committed a fiduciary breach by replacing an investment fund with funds that produced greater revenue sharing for the benefit of the plan’s recordkeeper and the employer (see our Checkpoint article). The Eighth Circuit then instructed the trial court to reconsider the claim, applying the deferential Firestone standard of review, and if the trial court again found a breach, reconsider the method of calculating any damages. As a more accurate measure of damages, the Eighth Circuit suggested measuring the damages by the difference between the new funds’ performance and the minimum return of the subset of managed allocation funds that the fiduciaries could have chosen without committing a fiduciary breach. On remand, the trial court again concluded that a fiduciary breach had occurred, but it entered judgment for the fiduciaries because the participants had failed to present the evidence needed to show damages under the methodology proposed by the Eighth Circuit (see our Checkpoint article). Both parties appealed.

The Eighth Circuit’s latest decision affirms the trial court’s determination that a fiduciary breach occurred, but reopens the question of damages because the trial court failed to consider any method for measuring the plans’ losses other than the method suggested by the Eighth Circuit’s previous decision. As the court explains, that method was only one alternative that warranted consideration. Instead of adopting that method on the ground that it was “tacitly approved,” the trial court should have considered the participants’ arguments as to why that method was “misguided,” and decided for itself how to measure the damages. While the court does not say whether the measure of damages must compare returns on the new funds to returns on the replaced fund, it does reject two potential objections to that comparison. First, it observes that the applicable investment policy can be read to allow a “static” managed allocation fund like the replaced fund as well as “dynamic” funds like the new funds, so the comparison does not require the same style of fund management. And second, it notes that the investment differences between the replaced fund and the new funds are immaterial for purposes of the damages calculation, so comparing their returns would not necessarily be an inappropriate “apples-to-oranges” comparison.

EBIA Comment: The Eighth Circuit’s decision reopens the door to substantial damages on the fund selection and mapping claim. The amount ultimately awarded, however, will depend on the methodology developed by the trial court. (Given the history of this case, it would not be surprising to see the matter return again to the Eighth Circuit for further scrutiny.) In the meantime, the broader lesson of this portion of the case remains: Fiduciaries overseeing a change in funds and the selection of a default fund must be careful to avoid conflicts of interest and be prepared to demonstrate that they acted solely in the interests of plan participants and beneficiaries. For more information, see EBIA’s 401(k) Plans manual at Sections XXV.F.2 (“Revenue Sharing”) and XXXVII.H (“Claims for Breach of Fiduciary Duty”).

Contributing Editors: EBIA Staff.