The Tussey v. ABB ruling raises the importance of implementing a fiduciary 'circuit-breaker' for plan sponsors that wish to off-load fiduciary responsibility for the selection, monitoring, and replacement of a plan's investment options.
W. Scott Simon is a principal at Prudent Investor Advisors, a registered investment advisory firm. He also provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. Simon is the recipient of the 2012 Tamar Frankel Fiduciary of the Year Award.
In this month's column, I continue to mine the riches provided by federal district court judge Nanette Laughrey in her 81-page opinion handed down in Tussey v. ABB, Inc. in late March. A fiduciary governance issue raised in that opinion is the subject of this column. Advisors with plan sponsor clients that wish to mitigate their fiduciary risk can bring this issue to their attention and provide a solution.
A Brief Review of the Case
Before getting to these issues, a brief review of the case is in order. Defendant ABB, Inc. (ABB) sponsored a number of retirement plans (totaling $1.4 billion in 2000), two of which were the subject of the Tussey lawsuit: the Personal Retirement Investment and Savings Management Plan and the Personal Retirement Investment and Savings Management Plan for Represented Employees (collectively, PRISM Plans), both 401(k) plans.
Plaintiff Ronald Tussey and others sued ABB, three ABB entities that were responsible in part for running the PRISM Plans, as well as other defendants for damages and injunctive relief. Two of these three ABB entities were (1) the three-member Employee Benefits Committee of ABB, Inc. (EB Committee), which is the named plan administrator pursuant to section 3(16) of the Employee Retirement Income Security Act (ERISA), appointed by the ABB board to oversee all employee benefits programs at ABB; and (2) the Pension Review Committee of ABB, Inc., (PR Committee), which is a named fiduciary of the PRISM Plans pursuant to ERISA section 402(a), responsible for selecting, monitoring, and replacing the PRISM Plans' investment options. (Alternatively, a named fiduciary could delegate such duties to a "discretionary" trustee pursuant to ERISA section 403(a) or to an ERISA investment manager pursuant to ERISA section 3(38).)
Did ABB, Inc. Fail to Mitigate Risk for Its Plan Fiduciaries?
In any 401(k) plan, the board of directors (BOD) of the company sponsoring the plan has the ultimate legal responsibility (and any potential related liability) for the plan. Even so, ERISA provides that a BOD may delegate fiduciary duties to various entities to mitigate some of that risk. It appears that ABB, Inc. did this in Tussey by, for example, naming the PR Committee as a named fiduciary and then delegating to it responsibility to select/manage/replace the investment options of the PRISM Plans. So far, so good.
However, note this language in Judge Loughery's opinion: "Changes to the [PRISM Plans] investment line-up must be approved by the Employees Benefits Committee and ABB, Inc." The word "approved" here seems to imply that not only the EB Committee but also ABB, Inc. itself had veto power over any "changes" made by the PR Committee in the plans' menu of investment options. If that's true, it would cancel out the discretionary authority delegated by ABB, Inc. to the PR Committee as a named fiduciary to select, monitor, and replace the investment options offered by the PRISM Plans. In turn, that would terminate whatever fiduciary protection the PR Committee had provided to the EB Committee and to ABB, Inc. concerning the investment options offered by the PRISM Plans. The effect of this would be for the EB Committee and ABB, Inc. to reassume fiduciary responsibility and liability instantly for the discretionary decision-making associated with the plans' investment options.
After all, ABB, Inc. (through its BOD)--the delegator of discretionary authority for the plans' investment options--cannot have it both ways. Either that delegation in Tussey is complete or it's not. A plan sponsor cannot transfer fiduciary responsibility for its plan's investments to another entity and then expect to retain a veto power over the prudence of the investments made by that entity. Once the legal responsibility delegated to the PR Committee was terminated, that responsibility (and related potential liability), as noted, reverted instantly to the EB Committee and to ABB, Inc.
What If ABB, Inc. Had Delegated Fiduciary Responsibility Without a Veto?
But what if ABB, Inc. had, in fact, "properly" delegated fiduciary responsibility (as well as any potential related liability) to the named fiduciary PR Committee? That is, what if changes to the menu of investment options in the PRISM Plans were not subject to the veto of the EB Committee and ABB, Inc.? If that were the case, the discretionary authority delegated by ABB, Inc. to the named fiduciary PR Committee to select, monitor, and replace the investment options offered by the PRISM Plans would be retained. And that, in turn, would legally protect the EB Committee and ABB, Inc. from liability for the PR Committee's decisions concerning the prudence of the investment options offered by the PRISM Plans (assuming, of course, that the initial decision by the EB Committee and ABB, Inc. to retain the PR Committee was prudent and continued to be so).