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A Closer Look at the Fiduciary Governance Structure in Tussey v. ABB

How plan sponsors choose to delegate responsibilities can impact their degree of liability.

W. Scott Simon, 09/06/2012

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. 

A reader of last month's column made some astute observations of my discussion about the fiduciary governance structure in Tussey v. ABB, Inc. This month's column will further that discussion hopefully. But first, here's a recap of the fiduciary governance structure in Tussey.

Tussey's Fiduciary Governance Structure
In Tussey, Federal district court judge Nanette Laughrey presided over a four-week bench trial in Missouri, and in late March issued an 81-page opinion. In the case, the plan sponsor (ABB, Inc.) of two defined contribution plans (PRISM Plans) appointed the pension review committee (PR Committee) as a 402(a) named fiduciary of the plans and delegated to it responsibility and liability for selecting, monitoring, and replacing the plan's investment options (i.e., doing the same things as a 3(38)). ABB also appointed the employee benefits committee (EB Committee) as the plan's 3(16) plan administrator and delegated to it the authority to oversee all employee benefits programs at ABB.

Judge Laughrey noted in her opinion: "Changes to the [PRISM Plans] investment line-up must be approved by the Employees Benefits Committee and ABB, Inc." I said in last month's column: "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."

I then posed a "what-if?" question: What if changes made in the investment options by the PR Committee were not subject to veto by ABB and the EB Committee? Wouldn't that therefore mean that the delegation from ABB to the PR Committee to select, monitor, and replace the investment options would be valid? And wouldn't that, in turn, legally protect ABB and the EB Committee from liability for the PR Committee's decisions concerning the prudence of the investment options?

My answer to that what-if question was no. In my view, the better way to mitigate the risk of a plan sponsor's fiduciaries would be through the use of what I call a "fiduciary circuit-breaker." That is, rather than delegating selection/monitoring/replacing duties to the PR committee, give the PR committee the authority to hire an investment manager that would itself then select the menu of investment options. To me, that would seem to legally protect the delegating fiduciary such as a named fiduciary (an example of what I referred to as a fiduciary "higher-up") from potential liability for imprudent investment decisions made by the investment manager. It was this that I thought would serve as a "fiduciary circuit-breaker." If the PR committee had made the selections, though, the circuit-breaker would not be put in place and liability could lead all the way back up the chain of command to ABB's board of directors.

A Reader's Observations
Here, in part, are the observations made by the reader: "…I don't see any difference in liability protection between [ABB's board of directors (BOD)] appointing a 402(a) committee to select and monitor investments and the BOD's appointing a plan committee to pick a 3(38) manager. It seems that the liability protection for the plan sponsor--the circuit breaker--is not between the BOD and the plan committee, regardless what functions that plan committee performs, but arises from the selection of an external entity to serve as a 3(38) investment manager. If your liver has cancer, you have cancer. If your BOD committee is guilty, the sponsor is guilty."

My Reply
Here is my reply to the reader: I believe that we agree on everything I wrote in last month's column (including the value of a 3(38)) except for one (albeit significant) issue: whether plan fiduciaries gain an added legal benefit when a plan sponsor delegates to a plan committee the task of finding and vetting a 3(38) investment manager and, upon the committee successfully carrying out that task, the manager making the selecting/monitoring/replacing decisions.

You contend that this (purported) legal benefit doesn't exist because it's no different than when a plan sponsor delegates to a 402(a) named fiduciary the selecting/monitoring/replacing decisions. So in either event, you say that the responsibility and liability would still flow back up to the plan sponsor, thereby canceling any additional benefit.

I contend that the responsibility/liability is effectively cut off (i.e., the "fiduciary circuit-breaker" between the plan sponsor and the plan committee when the committee is appointed to find/vet a 3(38) only, thereby protecting the fiduciary "higher-ups."

These two different delegation scenarios can be diagrammed in the following way:

Scenario 1: plan sponsor → 402(a) named fiduciary
Here, the plan sponsor delegates to a named fiduciary responsibility for selecting/monitoring/replacing plan investment options. In making that delegation, the plan sponsor retains the responsibility/liability for selecting/monitoring/replacing investment options. Why? Because the plan sponsor would be responsible/liable for the failure of the named fiduciary to carry out what it had been delegated to do: prudently selecting/monitoring/replacing investment options.

Scenario 2: plan sponsor → plan committee → 3(38) investment manager
Here, the plan sponsor delegates to a plan committee responsibility to find and vet a prudent 3(38) investment manager. Once identified and vetted by the plan committee, the 3(38) would then become responsible/liable for selecting/monitoring/replacing investment options. In making that delegation, a fiduciary circuit-breaker kicks in to isolate the plan sponsor from the responsibility/liability for selecting/monitoring/replacing investment options. Why do I think that? Because the plan sponsor would only be responsible/liable for the failure of the committee to carry out what it had been delegated to do: prudently vetting and finding a 3(38).

In both scenarios, the responsibility and liability would indeed flow back up to the BOD but what would that actually be? In the first scenario, it seems to me, as noted, that the responsibility/liability would be for the failure of the named fiduciary to carry out what it had been delegated to do: prudently selecting/monitoring/replacing investment options. In the second scenario, it seems to me, as noted, that the responsibility/liability would be only for the failure of the plan committee to carry out what it had been delegated to do: prudently vetting and finding a 3(38).

In my mind, there's a significant difference between a fiduciary "higher-up" getting nailed legally for the failure of a delegatee to select, etc. prudent investment options and it getting nailed for the failure of a delegatee to find/vet a 3(38). In ERISA, liability follows accountability; you can be held liable for the duty which you have delegated. So when you say "If your BOD committee is guilty, the sponsor is guilty," I agree. But guilty of what? In scenario 1, the guilt on the part of fiduciary "higher-ups" is for the failure of the delegatee (a 402(a) named fiduciary) to select prudent investment options and in scenario 2, the guilt on the part of fiduciary "higher-ups" is for the failure of the delegatee (a plan committee) to find/vet a 3(38).

But I Could Be Wrong
It's always possible that I'm all wet in my thinking and that the reader is right. For example, I may have misinterpreted the fiduciary governance angle of this case from the get-go. When Judge Laughrey noted in her opinion that "Changes to the [PRISM Plans] investment line-up must be approved by the Employees Benefits Committee and ABB, Inc.," I assumed that fiduciary acts were involved (someone I once knew told me that sometimes when we assume, that makes an "a**" of "u" and "me"). But if, in fact, no fiduciary acts were involved--that is, the Employees Benefits Committee and ABB, Inc. simply wanted to distribute the workload but always wished to retain fiduciary control with no idea of delegating any fiduciary authority, well, then, this discussion largely would be moot. If the primary documents of the case were available, we might be able to get a clear-cut answer as to what the plan fiduciaries meant by their need to "approve" changes in the plans' investment line-up.

I know of no cases dealing with this particular issue. In any event, perhaps the difference of view between the reader and me is not so great. He and I both agree on the significant protection provided by an investment manager pursuant to ERISA section 3(38). The only difference, then, seems to be in degree rather than in kind.

W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He is the author of two books, one of which, The Prudent Investor Act: A Guide to Understandingis the definitive work on modern prudent fiduciary investing.

Simon provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. He is a member of the State Bar of California, a Certified Financial Planner, and an Accredited Investment Fiduciary Analyst. Simon's certification as an AIFA qualifies him to conduct independent fiduciary reviews for those concerned about their responsibilities investing the assets of endowments and foundations, ERISA retirement plans, private family trusts, public employee retirement plans as well as high net worth individuals.

For more information about Simon, please visitPrudent Investor Advisors, or you can e-mail him at wssimon@prudentllc.com

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar.

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