A recent decision, Tussey v. ABB, Inc., 2012 WL 1113291 (W.D. Mo. 3/31/2012), has drawn much attention in the retirement plan community. In Tussey, a U.S. District Court found that ABB, Inc., along with several of the company's plan administration committees (collectively, "ABB"), breached its fiduciary duties under ERISA because its 401(k) plans were paying excessive fees to the plans' vendor, Fidelity. As a result, the court ordered ABB to pay more than $35 million in damages.

Of the damages awarded, approximately $13 million related to ABB's failure to keep recordkeeping fees paid to Fidelity within reason or to look out for the plans participants' best interests. Specifically, the court noted that ABB did not have a good grasp on the fees that the plan was paying to Fidelity through its revenue-sharing agreement. Further, the court found it troublesome that ABB took no action with respect to these fees, even after receiving a report from its benefits consultant, noting that the plan recordkeeping fees paid by ABB's 401(k) plans were excessive and appeared to be subsidizing other non-plan-related services that Fidelity provided to ABB.

Approximately $22 million of the damages awarded related to ABB's decision to replace Vanguard investment options previously available under the company's 401(k) plans with Fidelity investment options, and in doing so, choosing Fidelity investment options with higher-fee share classes when investment options with lower-fee share classes were available. The court noted that the choice to switch providers was not the result of a "deliberative assessment on the merits," but instead appeared to be motivated by ABB's desire to reduce its own costs and compensate Fidelity through increased revenue sharing. Further, the court found the decision by ABB to choose higher-fee share class options, which eliminated any per-participant fees due from ABB in exchange for higher revenue sharing with Fidelity, to be in direct violation of the plans' governing documents that required the plan fiduciaries to select the investment options with the lowest cost of participation.

While Tussey has been creating a buzz in part because of the sheer dollar amount of damages awarded, it also has highlighted some important lessons for the retirement plan community:

  • Plan documents and investment policies must be followed (i.e., if the plan's investment policy provides that fiduciaries must choose the investment option with the lowest cost of participation, choosing the higher-fee share class option is not acceptable).
  • Action must be taken when a consultant's report notes problems with plan administration (ABB's inaction following the consultant's report appeared to be a contributing factor to the unusually high damages).
  • Revenue sharing as a means of compensating plan service providers is acceptable provided the fees are reasonable and the arrangement is administered in a prudent manner.

Interestingly, the court found that ABB did not have a duty to disclose its compensation arrangement with Fidelity to plan participants. However, note that under new ERISA regulations that generally become effective August 30, 2012, retirement plans do have a duty to disclose information about plan expenses charged to 401(k) participant accounts.

This article is presented for informational purposes only and is not intended to constitute legal advice.