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On March 31, 2026, the United States District Court for the Central District of California, in Bugielski et al. v. AT&T et al., denied defendants’ (fiduciaries of the AT&T Retirement Savings Plan) motion for summary judgment with respect to (among other things) the reasonableness of the compensation paid to Financial Engines (now Edelman Financial Engines) and (indirectly) to Fidelity (the plan’s recordkeeper). A critical issue in the case was whether the plan fiduciaries adequately considered those indirect FE-to-Fidelity fees. And in this note, we focus on that issue.
Plaintiffs are former participants in the plan who are suing plan fiduciaries alleging (among other things) that the FE/Fidelity transaction was a non-exempt prohibited transaction. Under ERISA, payment of fees to a service provider is generally a prohibited transaction, but there is an exemption where the service provider arrangement is reasonable and necessary and the compensation paid to the service provider is reasonable.
Plaintiffs' claim is that plan fiduciaries did not adequately consider indirect fees paid to Fidelity by FE (“for access to Fidelity’s platform and user data”) in determining the reasonableness of FE’s and Fidelity’s fees.
The court described the economics of this transaction as follows:
“To provide [FE’s advice services] to Plan participants on Fidelity’s platform, Financial Engines entered into a separate agreement with Fidelity, under which Financial Engines paid Fidelity for access to Fidelity’s platform and user data. … Under this agreement, Financial Engines initially paid Fidelity approximately 57% of the fees it received from the Plan, amounting to several million dollars in indirect compensation to Fidelity. … In October 2015, the fee paid to Fidelity was reduced to approximately 45-47% of Financial Engines’ fees, … which still resulted in millions of dollars in indirect compensation for Fidelity.”
The court found that the question of whether plan fiduciaries had adequately considered the indirect compensation paid by FE to Fidelity came down to an argument about what the facts showed, and she therefore denied defendants’ motion.
Specifically, the court found it could not determine “as a matter of law” that “the compensation paid to Fidelity was the same compensation that ‘would ordinarily be paid for like services by like enterprises under like circumstances.’”
Because these decisions will typically turn on the facts – about what the plan fiduciaries actually did with respect to indirect compensation – we are going to quote the court’s discussion of those facts, for and against the plan fiduciaries, at length – to give sponsors a flavor of what might or might not be an adequate review of this sort of indirect compensation arrangement.
In support of the motion, defendants argued that:
The “uncontroverted evidence” shows defendants knew of the FE-Fidelity fee arrangement, prepared an estimate of those fees, and “ultimately approved the fees before signing a renewed agreement with Fidelity.”
Defendants argued that they “leveraged the fees paid to Fidelity to negotiate lower recordkeeping expenses.”
The plan’s agreement with Fidelity contained a “most favored customer” clause, and the agreement with FE provided that participants would not be charged “any additional fees as a result of the payments.”
· According to a Deloitte report, plan recordkeeping fees “were similar to or lower than fees charged to other comparable plans.”
Countering these arguments, the court noted that:
The only evidence that the FE-to-Fidelity indirect compensation was “leveraged” by AT&T to negotiate lower fees was testimony from AT&T’s Vice President for Retirement, Phipps, and “hinges on a credibility determination.”
In addition, “there is some reason to be skeptical of Phipps’ testimony. As Phipps himself acknowledged, ‘recordkeeping fees were dropping significantly across the board,’ which ‘may have factored in’ to the negotiated reduction in fees.” In addition, the fee reduction did not come until three years after the plan entered into its arrangement with FE.
Defendants’ comparison of other plans’ recordkeeping fees did not address the issue of indirect compensation, and the “most favored customer” clause in the Fidelity contract only relates to direct fees.
Defendant officials made statements during depositions “that suggest Defendants did not evaluate the reasonableness of the indirect compensation paid by Financial Engines.” E.g., Phipps testified: “I wouldn’t say we did an analysis to determine, you know, any fees that one of our vendors paid to anybody else they contract with, and that would include Financial Engines.” And he stated that “what Financial Engines and Fidelity worked out for fees[] was between them,” and that plan fiduciaries “typically did not evaluate the fees that our vendors would pay to third parties.” AT&T Services’ Vice President for Benefits, Julianne Galloway testified that the indirect compensation agreement “is between Fidelity and Financial Engines and is part of their negotiations. We contract separately and independently with Fidelity and with Financial Engines.” Finally, when Galloway asked “about whether [the fee paid by FE to Fidelity] was a reasonable fee,” she responded, “I did not see documentation as to that effect.”
On the basis of these conflicts over the facts, the court denied defendants’ motion for a summary judgment, finding that with respect to this and a related prudence claim “there is a triable issue of fact as to the reasonableness of Defendants’ arrangement with Financial Engines.”
To repeat, we’ve gone this deep into these facts to help sponsors/sponsor fiduciaries get a feel for what courts believe will matter in deciding this sort of case – what sort of conduct might hurt or help their case in court.
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The issue of plan fiduciary liability for service provider prohibited transactions and what constitutes “reasonable compensation” for service providers have a higher profile post the Supreme Court’s decision in Cunningham v. Cornell.
Some previous litigation on this issue has ended with the defendants getting plaintiffs’ cases dismissed, generally based on flaws in plaintiffs’ pleadings. It is possible that the plaintiffs in Bugielski have found a way to “crack the code” – how to plead this sort of claim and not get dismissed.
In any case, fiduciaries of plans with these sorts of arrangements may want to review with counsel their process for considering indirect compensation paid to service providers (especially, indirect compensation paid to recordkeepers and “platform providers”).
We will continue to follow this issue.
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This is a publication of O3 Plan Advisory Services. If you have any comments or have questions about regulatory developments, please contact your relationship manager or Mike Barry at mbarry@octoberthree.com.
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