Appellate Court Takes Away AT&T Win in Excessive Fee Suit

It’s not the first time out for these plaintiffs (Julio C. Alas, Robert J. Bugielski, and Chad S. Simecek), though it is their first win. 

They lost twice already at the district court level—once in September 2021 and again back in 2018. (when they had been accorded a chance to “fix” their arguments). So, what’s different this time?

The Case

In essence the plaintiffs here alleged that the AT&T failed to implement a process to control the administrative expenses that participants in the AT&T Retirement Savings Plan paid to the plan recordkeeper (Fidelity), that they failed to analyze and evaluate compensation paid to Fidelity from Financial Engines Advisors L.L.C., and that as a result of these failures, participants not only “paid grossly excessive fees to Fidelity,” but that they engaged in a prohibited transaction with Fidelity in defiance of ERISA Section 406(a), failed to obtain from Fidelity the required disclosures of direct and indirect compensation in connection with all the services that Fidelity was providing—which, in turn, resulted in Defendants failing to ascertain whether Fidelity’s total compensation was reasonable. They further claimed that the AT&T defendants failed to report Fidelity’s compensation accurately on the required annual Form 5500—a violation of the duty of candor set forth in ERISA Section 404(a).

Said another—perhaps more succinct—way, the plaintiffs argued that after AT&T engaged Fidelity as recordkeeper, Fidelity engaged Financial Engines for additional services (new brokerage and investment advisory services)—which the plaintiffs alleged not only cost plan participants more, but that AT&T got a discount on administrative services as a result.[1] They also accused AT&T of breaching its “duty of candor” by not listing the money paid to Fidelity on the Form 5500 annual reports.

The (New) Decision

Writing for the U.S. Court of Appeals for the Ninth Circuit (Bugielski v. AT&T Servs., Inc., 9th Cir., No. 21-56196, 8/4/23), Circuit Judge Bridget S. Bade acknowledged their conclusions differed from other federal courts,[2] concluding that “AT&T, by amending its contract with Fidelity to incorporate the services of BrokerageLink and Financial Engines, caused the Plan to engage in a prohibited transaction.” And in making that determination, remanded the case to the district court for reconsideration as to whether AT&T met the requirements for an exemption from the prohibited-transaction bar because the contract was “reasonable,” the services were “necessary,” and no more than “reasonable compensation” was paid for the services. Specifically, they wanted the district court to consider “whether Fidelity received no more than ‘reasonable compensation’ from all sources, both direct and indirect, for the services it provided the Plan.”

They also reversed the district court’s summary judgment on the duty-of-prudence claim, concluding that, “as a fiduciary, AT&T was required to monitor the compensation[3] that Fidelity received through BrokerageLink and Financial Engines,” directing the lower court to also consider the duty-of-prudence claim “under the proper framework in the first instance.” As for the issue of reporting, the appellate panel affirmed as to the compensation from BrokerageLink—and reversed as to the compensation from Financial Engines. The appellate panel concluded that AT&T adequately reported the compensation from Financial Engines on its Form 5500s with the Department of Labor—but did not adequately report the compensation from Financial Engines because an alternative reporting method for “eligible indirect compensation” was not available.

What This Means

It’s hardly controversial to suggest that, in order to ascertain whether the fees and services rendered to the plan are reasonable, the fiduciary has to know what those fees and services are. The federal court decisions that the Ninth Circuit cited as contrary seemed to turn on an obligation for the plaintiff to have and assert that knowledge, though a major factor/difference here seemed to be the consideration of the terms of the third-party contract under ERISA Section 406.[4] 
In that sense, what we seem to be left with—and we’ve noted this before—is a different standard of review/consideration in these excessive fee/fiduciary breach cases, depending on where the suit is brought/filed.    

Footnotes

[1] Under the agreement, Financial Engines charged asset-based fees, and it entered a separate agreement with Fidelity to access plan participants' accounts. Under the second agreement, Financial Engines agreed to share a portion of its fees with Fidelity, which resulted in millions of dollars for Fidelity, according to court documents.

[2] The court noted a distinction between decisions in the Third (specifically the decision in Sweda v. University of Pennsylvania) and Seventh (specifically the decision in Albert v. Oshkosh Corporation) circuits, which had rejected prohibited transaction claims targeting contracts between retirement plans and their recordkeepers. The Ninth Circuit felt that its approach was the “best reading of the statutory text, as corroborated by the agency tasked with administering the relevant regulations.”

[3] “AT&T does not even attempt to argue that it considered the compensation Fidelity received from the mutual funds available through BrokerageLink,” Judge Bade wrote. “And to support its argument that it considered the compensation Fidelity received from Financial Engines, AT&T cites testimony from an AT&T executive that he “took note of” that compensation and took it “into account.” But another AT&T executive testified that “what Financial Engines and Fidelity worked out for fees, was between them,” while another echoed that sentiment and suggested that AT&T “really didn’t make an inquiry about whether [the fee paid by Financial Engines to Fidelity] was a reasonable” one. On balance, this conflicting testimony does not support AT&T’s claim that it considered the compensation Fidelity received from Financial Engines.”

[4] “Section 406(a)(1)(C) is not a complete ban; instead, it requires fiduciaries, before entering into an agreement with a party in interest, to understand the compensation the party in interest will receive, evaluate whether the arrangement could give rise to any conflicts of interest, and determine whether the compensation is reasonable,” Judge Bade wrote. She continued, “In short, to determine whether ‘no more than reasonable compensation is paid’ for a party in interest’s services, EBSA envisioned that a fiduciary would consider the compensation received by the party ‘from all sources in connection with the services it provides to a covered plan pursuant to’ the contract, not just the compensation the party receives directly from a plan.”