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May 1, 2012

Plan Fiduciaries Liable for Permitting Excessive 401(k) Fees

A Federal district court has held that fiduciaries of two 401(k) plans breached their fiduciary duties to participants by allowing the plans to pay excessive recordkeeping fees. Tussey v. ABB, Inc. et al. 2012 WL 1113291 (W.D. Mo. 2012). The decision illustrates how complex recordkeeping, administrative and investment management fee arrangements can expose plan fiduciaries to liability if not fully understood and carefully monitored. The decision is also particularly timely. New Department of Labor regulations requiring service providers to disclose fee information to plan fiduciaries take effect on July 1, 2012.

The employer (ABB, Inc.), sponsored two 401(k) plans holding approximately $1.4 billion in assets. Each plan retained Fidelity Trust (an affiliate of Fidelity Investments) as its directed trustee. At the beginning of their relationship with Fidelity, each plan paid Fidelity Trust an annual recordkeeping fee based on a fixed amount per participant. Over time, Fidelity Trust and the plans reduced, and eventually eliminated the per-participant fee, replacing it with a "revenue sharing" arrangement. Under this arrangement, Fidelity Investments (the investment arm of Fidelity) paid to Fidelity Trust a portion of Fidelity Investments' administrative fee charged against the assets of the underlying mutual funds in which each plan invested. The court found that this arrangement resulted recordkeeping fees many times in excess of the original per-participant fee, and significantly in excess of market value. The court held that the fiduciaries failed to monitor the recordkeeping fees and ordered them to restore $13.4 million in excess fees to the plans.

The court also held that the fiduciaries breached their duties to the plans by removing the Vanguard Wellington fund from the plans' investment line-up and "mapping" (i.e. automatically transferring) the affected assets to Fidelity's Freedom fund. Unlike the Wellington fund, the Freedom fund participated in revenue sharing with Fidelity Trust. The Freedom fund charged substantially higher administrative fees than the Wellington fund. The court found that the mapping was motivated primarily by ABB's desire to retain favorable pricing between it and Fidelity for non-plan related services, and that the fiduciaries gave little consideration to how the mapping would impact plan participants. The court ordered the fiduciaries to restore $21.8 million to the plans because of the mapping.

The court held that Fidelity shared no responsibility for these breaches of duty. The following factors played heavily in the court's opinion:

Conflicts of Interest between the Employer and the Plans. The court found that the revenue sharing fees from the 401(k) plans subsidized services that Fidelity Trust provided directly to ABB that were unrelated to the 401(k) plans. These services included payroll services, recordkeeping for ABB's health and welfare plans, and recordkeeping for ABB's executive compensation arrangements. The court also found that ABB benefited by burying the recordkeeping costs within the expense ratios of the underlying mutual funds. The court found that hiding the costs in this manner made the plans look less expensive to the participants, thus enhancing the plans as an employee recruitment and retention tool. Finally, the court found that Fidelity provided ABB a direct financial incentive to promote Fidelity funds that paid revenue sharing dollars to Fidelity Trust. The court found that, instead of using the plans' bargaining power to challenge Fidelity's pricing structure, the fiduciaries accepted these incentives.

Passive Committees. The court described the administrative and investment committees of ABB's board as little more than rubber stamps for the ABB's Pension and Thrift Management Group (the employer's management group responsible for the plans (the "Management Group")). The court found that neither committee ever calculated the dollar amount of the recordkeeping fees paid to Fidelity Trust, despite being advised by an independent human resources consultant that the plans appeared to be overpaying for recordkeeping services and subsidizing corporate services that Fidelity was providing to ABB.

With respect to mapping from the Wellington fund to Fidelity's Freedom fund, the court described the Management Group's research of the investments as "superficial and minimal" and the investment committee's review of the group's recommendations as "cursory." According to the court, the head of the Management Group failed to provide investment return information regarding the Wellington fund to the investment committee, despite his recommendation to remove the fund for "deteriorating performance," and the committee never requested this information. The court also found that the Management Group alone screened possible replacements for the Wellington fund. The investment committee made no independent investigation of the investment alternatives.

Ignoring the Investment Policy Statement. The court found that ABB's investment committee adopted an Investment Policy Statement ("IPS") proposed by the head of the Management Group at the same meeting that it approved the mapping from the Wellington fund to the Freedom fund. The court described the steps outlined in the IPS relating to the removal and replacement of funds from the plans' investment line-up. The court concluded that the committee followed none of them.

Lessons of Tussey. Tussey provides a number of lessons to plan fiduciaries regarding fees charged by a plan's service providers. First, fiduciaries owe a duty to plan participants to monitor fees and expenses. Second, although a service provider may serve both the plan and the employer, the fiduciaries owe their exclusive loyalty to the plan. Fiduciaries that allow the interests of the employer to influence their decisions as fiduciaries, do so at their peril. Third, fiduciaries are expected to understand the fee arrangements that impact the plan. This includes complex arrangements in which service providers receive compensation in multiple forms and from multiple sources. Fourth, fiduciaries who serve as members of administrative or investment committees of the Board have a duty to question management employees about decisions that affect the plan. Fiduciaries must obtain from management employees information from which they can make independent, informed decisions. Once they obtain that information, they must exercise their own judgment. Finally, investment policy statements are intended to guide the decision making process. Fiduciaries who ignore an ISP are likely to find the ISP used as evidence of their breach of duty. Conversely, following an ISP provides a fiduciary with a significant amount of protection from claims of breach of duty.

For more information. Please contact Raymond McCabe at (716) 566-1408 or by e-mail at


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