Tenth Circuit Affirms District Court’s Damages Calculation in 401(k) Breach of Fiduciary Duty Litigation

The Tenth Circuit Court of Appeals recently decided Ramos v. Banner Health, et al., No. 20-1231, __F.3d__, 2021 WL 2387909 (10th Cir. June 11, 2021). This case involves a class of plan participants in Banner Health, Inc.’s 401(k) defined contribution savings plan that, following an eight-day bench trial, prevailed in the district court in establishing that Banner and other plan fiduciaries breached their ERISA fiduciary duties by failing to monitor its recordkeeping service agreement with Fidelity Management Trust Company. Banner’s Retirement Plan Advisory Committee hired Fidelity in 1999 to provide recordkeeping and administrative services to the Plan. Until 2017, Banner paid Fidelity through an uncapped, revenue-sharing arrangement. In 2012, Fidelity and Banner agreed to establish a revenue credit account which would be funded by reimbursements from Fidelity’s revenue-sharing proceeds and could be used to pay Plan expenses. The amount of revenue credit was based on Plan features, assets, net cash flow, number of participants, and fund selection. In 2017, after this litigation was started, Fidelity and Banner reached a new arrangement at an annual rate of $42 per plan participant. The district court determined that Banner breached its duty of prudence by failing to monitor the service agreement with Fidelity and that the breached resulted in losses to the Plan.

The class’s expert witness, Martin Schmidt, testified the class had incurred over $19 million in losses due to the breach, but the district court calculated damages of about $1.6 million and awarded prejudgment interest calculated at the then IRS’s underpayment rate of 3.25%. The district court denied Plaintiffs’ request for injunctive relief and found that Banner had not engaged in a prohibited transaction with Fidelity as defined by 29 U.S.C. § 1106(a). The class appealed the district court’s method for calculating damages and prejudgment interest, denial of injunctive relief, and judgment for Banner on the prohibited transaction claim. The Tenth Circuit affirmed the district court on each issue.

First, the class argued that the district court erred by using Fidelity’s revenue credit account payments to estimate losses. The Ninth Circuit found that Mr. Schmidt did not rely on the two most relevant comparator plans in calculating damages. He relied on his experience with smaller plans and did not compare the plans to Banner’s Plan. Because of this, the district court did not abuse its discretion in finding there was not enough evidence to support Mr. Schmidt’s calculations. There is nothing inconsistent about the district court relying on some part of Mr. Schmidt’s testimony regarding liability, but not with respect to damages. The district court was permitted to use the revenue credits to estimate damages because it was a “reasonable approximation” of the recordkeeping losses. The credits were tied to specific Plan characteristics and using the credits as a measure of damages was not inconsistent with the court’s finding of breach. The district court was not obligated “to scour the record in search of a more generous theory of damages.”

Second, the class contended that the district court abused its discretion in selecting the IRS underpayment rate to calculate prejudgment interest. The court held that the district court did not abuse its discretion in selecting the IRS underpayment rate. While the rate might be lower than other possible rates the district court could have selected, the class did not provide definitive evidence of the Plan’s rate of return during the relevant time, the IRS underpayment rate has been used in ERISA cases, and it was well within the realm of permissible choice.

Third, the class argued that the district court misinterpreted ERISA in concluding the service agreement between Banner and Fidelity was not a prohibited transaction. The court found that an initial agreement with a service provider does not constitute a prohibited transaction. “The class’s interpretation [of § 1106] leads to an absurd result: the initial agreement with a service provider would simultaneously transform that provider into a party in interest and make that same transaction prohibited under § 1106.” The court concluded “that some prior relationship must exist between the fiduciary and the service provider to make the provider a party in interest under § 1106.” The class did not provide evidence showing that the service agreement between Fidelity and Banner was anything less than an arm’s length deal or that Fidelity had some pre-existing relationship with Banner.

Lastly, the class argued that the district court abused its discretion by denying the class injunctive relief by not requiring Banner to hold a request for proposals to test the market for recordkeeping and administrative services. By the time of judgment, Banner ended the uncapped revenue-sharing arrangement and agreed to a per-participant recordkeeping fee with Fidelity. The court found that the district court did not abuse its discretion in denying injunctive relief. The breach of fiduciary duty was Banner’s failure to adequately monitor the revenue-sharing arrangement. Once they ended that arrangement, the breach stopped. Because there is no evidence the breach is continuing, the district court’s decision to deny injunctive relief was not arbitrary or manifestly unreasonable.