9th Circuit Decision Shines a Spotlight on ‘Prohibited Transaction’ Definition

The 9th Circuit Court of Appeals reversed a lower court’s summary judgment decision in favor of AT&T in the case Bugielski v. AT&T. The decision is contrary to two other circuit court decisions and could significantly expand what is considered a prohibited transaction as it relates to defined contribution retirement plans. The discrepancy with the other courts could also pave the way to the U.S. Supreme Court.

The main component of the case focused on fees paid to the plan’s recordkeeper, Fidelity, from brokerage and managed account services that were added to the plan. These services were optional, and the fees were paid by participants using the services. The plaintiffs alleged that AT&T failed to monitor compensation paid to their recordkeeper, Fidelity, from its proprietary brokerage provider and a third-party advisor Financial Engines Advisors. The lower court, ruling in favor of AT&T, determined that the plan sponsor had no obligation to consider this arm’s length compensation and, therefore did not constitute a prohibited transaction as defined by ERISA Section 406(a). That provision states that a fiduciary shall not cause the plan to engage in a transaction between the plan and a party in interest if it results in furnishing goods, services, or facilities between the plan and a party-in-interest. The 9th Circuit Court disagreed, determining that the arrangement served Fidelity’s interests at the expense of plan participants and was therefore, a prohibited transaction.

The determination that there was a prohibited transaction does not mean the plaintiffs will win the case. A prohibited transaction can still be legal if it meets a statutory exemption. To meet this exemption the arrangement must be reasonable, must be necessary and no more than reasonable compensation may be paid for the service. With the 9th Circuit’s determination that there was a prohibited transaction, the case is remanded to the lower court to determine whether the arrangements meet that statutory exemption. It is unclear where the case will go from here, but one avenue could be for AT&T to seek Supreme Court review.

We will continue to monitor this case and its implications on plan fiduciaries' role as it relates to indirect compensation paid to their service providers.

Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice. Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

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