The U.S. Court of Appeals recently revived a lawsuit against AT&T Services Inc. and its retirement plan fiduciaries after a district court had granted summary judgment in favor of the telecommunications giant. The published decision, binding in the Ninth Circuit, focused on indirect fees received by service plan providers. This issue potentially subjects retirement plan fiduciaries to legal attacks they have not previously experienced. The case is Bugielski v. AT&T Services, Inc., 76 F. 4th 894 (9th Cir. 2023).
In finding triable issues of fact, the Ninth Circuit emphasized transactions between AT&T and Fidelity Workplace Services (“Fidelity”), its recordkeeper, and Edelman Financial Engines (“Edelman”), an investment advisory services firm. Through these contracts, Fidelity received indirect fees from some mutual funds offered through its brokerage window, which AT&T allowed through its contract with Fidelity. Furthermore, Fidelity received a share of the fees paid to Edelman for investment advice, as AT&T allowed Fidelity to contract directly with Edelman. The court concluded that these were prohibited transactions under ERISA, since they caused the plan directly or indirectly to furnish goods and services to Fidelity, a party-in-interest to the plan.
Additionally, the Ninth Circuit found triable issues of fact as to whether the plan’s fiduciaries breached their duty of prudence by allegedly failing to review Fidelity’s compensation stemming from these prohibited transactions. Finally, AT&T allegedly failed to disclose compensation from the transactions between Fidelity and Edelman on its Form 5500 filings.
In its ruling, the Ninth Circuit rejected precedents from the Third and Seventh Circuits, which required a finding of a plausible allegation of nefarious intent by the parties entering the prohibited transactions. Instead, the Ninth Circuit adhered to a stricter and more literal reading of the prohibited transaction rules, finding that AT&T had engaged in prohibited transactions simply by amending its contracts to allow the transactions between Fidelity, its brokerage window, and Edelman to occur.
The takeaway from this decision is that plan fiduciaries must collect information concerning all direct or indirect compensation that plan service providers receive concerning the services they provide. Fiduciaries should document their procedures for obtaining and reviewing that information to show compliance with their duty of prudence and a demonstration that the compensation received is reasonable.
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