Ninth Circuit Ruling Highlights Plan Fiduciary Obligation to Review Service Provider Compensation

On August 4, 2023, the Ninth Circuit Court of Appeals affirmed in part and reversed in part the US District Court for the Central District of California’s granting of summary judgment to the defendants in an ERISA class action brought by former AT&T employees who contributed to AT&T’s retirement plan (the plaintiffs), a defined contribution plan. Defendants in the case are the plan’s administrator, AT&T Services, Inc., and the committee responsible for some of the plan’s investment-related duties, the AT&T Benefit Investment Committee (the defendants).

The plaintiffs alleged that when the defendants amended their contract with the recordkeeper to allow the recordkeeper to engage a brokerage account platform and investment advisory services for participants, it failed to investigate and evaluate all the compensation that the plan’s recordkeeper received for these additional services. According to the plaintiffs, this failure resulted in the contract between the defendants and recordkeepers being a “prohibited transaction” under ERISA Section 406. The plaintiffs also alleged that the failure to consider the compensation to the recordkeeper was a breach of the defendants’ fiduciary duty of prudence. By granting the defendants’ summary judgment motion, the district court was, in effect, finding that, even if the plaintiffs proved all their allegations, there was still no violation of the law.

By reversing the grant of summary judgment, the Ninth Circuit concluded that when the defendants amended their contract with the plan recordkeeper to add brokerage and investment advisory services, it engaged in a prohibited transaction under ERISA. This conclusion is contrary to what two other circuit courts have found, creating the possibility of an appeal to the Supreme Court.

The Court remanded the case to the district court to determine if any exemptions from the prohibited transaction rule exist, whether the contract was “reasonable,” whether the services were “necessary,” and whether no more than “reasonable compensation” was paid for services. Specifically, the district court was instructed to consider whether the plan recordkeeper received no more than “reasonable compensation” from all sources, both direct and indirect, for the services provided to the plan. The Court also reversed the granting of summary judgment for the breach of fiduciary duty claim, in the context of failure to monitor the compensation the recordkeeper received from the brokerage services company.

While this case involved a retirement (401(k)) plan, the ERISA sections involved apply also to ERISA health plans. This ruling reflects an expansion of which types of contracts between plan administrators and plan service providers constitute prohibited transactions. Health plan and retirement plan administrators should keep the prohibited transactions section of ERISA in mind when contracting with service providers to make sure service providers receive only reasonable compensation.

Bugielski v. AT&T Services, Inc. »