By Kent Peterson
A United States District Court in Missouri ruled on the Tussey vs. ABB, Inc. case on March 31, 2012. This case is noteworthy as the court found the defendant and plan fiduciaries (ABB) breached their fiduciary responsibilities in regard to two 401(k) plans. The Judge’s order resulted in $36.2 million in damages being awarded1.
The court found the following five violations of ABB’s fiduciary responsibility:
- Failure to monitor recordkeeping costs.
- Failure to negotiate rebates for the Plan from investment companies chosen to be on its platform.
- Selected more expensive share classes when less expensive share classes were available.
- Removed the Vanguard Wellington Fund and replaced it with Fidelity’s Freedom Funds in violation of the Investment Policy Statement.
- Agreed to pay Fidelity Trust (recordkeeper for the two 401(k) plans) an amount that exceeded the market costs for plan services in order to subsidize non-plan corporate services (including payroll and recordkeeping for the health and welfare and the defined benefit plans) provided to ABB also by Fidelity Trust.
The Tussey decision at its core is most concerned with a prudent, “deliberative,” fiduciary process. While some findings of fact indicated self-dealing, the court emphasized the need to create, implement and document prudent fiduciary processes when evaluating plan fees and expenses.
Monitoring recordkeeping costs
Under ERISA 404(a)(1), the duty of loyalty requires a fiduciary to:
Discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and for the exclusive purpose of:
i. providing benefits to participants and their beneficiaries; and
ii. defraying reasonable expenses of administering the Plan.
The court found that “ABB never determined how much revenue sharing was collected by Fidelity Trust and; therefore, did not and was never in a position to ask for a rebate when Fidelity Trust’s revenue sharing exceeded the value of the recordkeeping services provided.” Without knowledge of the amount of fees collected, ABB could not accurately assess the reasonableness of the expenses of administering the Plan. In addition, the court indicated that ABB fiduciaries were not concerned about the cost of recordkeeping unless it increased ABB expenses or caused the plans to be less attractive to its employees as a result of hard-dollar, per-participant fees.
The court also questioned why “participants who choose actively managed funds (with higher revenue sharing) should pay more than participants who choose index funds (with little or no revenue sharing) regardless of the amount of assets they maintain in the plan.” The court found no evidence “that recordkeeping for an account with assets that are invested in actively managed mutual funds is more costly than recordkeeping for an account with assets that are invested in passive funds or index funds,” nor did they find evidence demonstrating “why such ‘progressivity’ is in the best interests of all Plan participants.”
Negotiation of rebates from fund companies
ABB was found by the court to have violated their Investment Policy Statement, which required that at “all times, [Alliance] rebates will be used to offset or reduce the cost of providing administrative services to Plan participants.” Evidence showed that ABB did not actually use the rebates to offset or reduce the cost of the Plan administration. “Instead, ABB permitted Fidelity to take the revenue sharing to cover recordkeeping costs but this did not lower administrative costs.” In fact, the court was presented with expert testimony that costs were actually above-market.
The court also indicated that it “is not stating that revenue sharing is an imprudent method for compensating a Plan’s recordkeeper…However, if a Plan sponsor opts for revenue sharing as its method of paying for recordkeeper services, not only must it comply with its governing Plan documents, but it must also have gone through a deliberative process for determining why such a choice is in the Plan’s and participants’ best interests.”
Selection of share class
ABB exercised fiduciary discretion when selecting the investment choices that were available to Plan participants. The court found that being put on a platform is a valuable benefit and gives large plans the opportunity to negotiate for rebates in exchange for that benefit. The court found that “ABB was required to leverage the PRISM Plan’s size and assets to reduce recordkeeping costs…ABB did none of this and did not even ask Fidelity Trust for a rebate or even discuss the issue with them.”
Investment lineup changes according to the Investment Policy Statement
The court found that the Plan’s removal of the Vanguard fund at the recommendation of the Plan committee was imprudent. Of particular note was a recommendation to the committee indicating that the Vanguard Wellington Fund should be removed due to “deteriorating performance” and because “participants would be empowered to create their own balanced funds using either actively or passively managed core fund offerings.” The Court, however, found no information to support the deteriorating performance claim was provided to the committee and that the actions of the committee were a violation of the Investment Policy Statement. Additional evidence provided to the Court shows that the Vanguard Wellington Fund was mapped to Fidelity Freedom Funds for purposes that benefited ABB rather than the retirement plan participants.
Subsidization of services not related to the Plan
During fee negotiations with Fidelity Trust, a representative of Fidelity Trust communicated to ABB that non-plan services were being provided to ABB on their health and welfare plan below market cost and to ABB’s non-qualified plans at no cost as a result of Fidelity Trust’s receipt of revenue sharing payments. In addition, Mercer, which was hired to assist in the fee negotiations, issued a report to ABB that indicated that “ABB overpaid for Plan recordkeeping services and that the Plan’s recordkeeping payments via revenue sharing appeared to be subsidizing services for ABB corporate plans.” Once ABB became aware that Plan recordkeeping fees appeared to be subsidizing other non-plan programs, there was a “fiduciary obligation to investigate and prevent any future subsidy.” ABB failed to do so.
A plan fiduciary is charged to look out for the best interests of the Plan participants at all times, even when it may be adverse to the fiduciary’s interests. The fiduciary must also evaluate that the quality and costs of services (investment and administrative) provided to the Plan are reasonable. In instances where services are being provided to the Plan and are also being provided for other corporate functions, the level of scrutiny must intensify by the Plan sponsor to ensure that Plan assets are being used for the exclusive benefit of Plan participants. When there is any reason to suspect subsidization outside of the Plan, there is a fiduciary responsibility to ensure that this is not the case or to correct the situation immediately. Fee transparency simplifies the fiduciary requirements. This further emphasizes another core element of fiduciary responsibility that is indivisible and carried out separately with respect to each respective employee benefit plan.
Because of the subjective nature of many fiduciary decisions documenting the process is a paramount consideration. At the heart of fiduciary responsibility is discretion. In exercising its discretion, the Tussey Court faulted ABB for its lack of process, failure to follow established plan documents, failure to implement a full and prudent review of fees and expenses, and failure to address issues that should have reasonably been scrutinized. In other words, results may be scrutinized with the benefit of hindsight, but bad results do not necessarily equal a fiduciary breach. Documented procedural prudence with respect to the decisions and processes followed will ultimately determine whether the decisions were fiduciarily sound.
Peterson, K. (2012, April). Court finds five violations of ABB’s fiduciary responsibility in Tussey v. ABB, Inc. Retrieved from: http://www.SecurianRetirementCenter.com/