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Jun 2012
18
June 18, 2012

An ERISA Lesson Learned the Hard Way: Tussey v. ABB, Inc.


The devil is in the details and may bring costly damages to unsuspecting companies. Recent ERISA fee litigation, the new Department of Labor service provider and participant disclosure rules and the development of new revenue sharing and fee allocation models within plans are all resulting in a new focus on:
 
  • The amount of recordkeeping fees impacting participants’ accounts;
  • The allocation of those fees (and their analog, revenue sharing) to participants’ accounts; and
  • The way those things are understood by the plan sponsor and communicated to participants.

The typical use of revenue sharing in a 401(k) plan to pay recordkeeping fees and other expenses can have the effect of burying those fees and expenses in a thick haze, to the point where some participants and plan sponsors believe the plan is “free.” It is not, of course, and that is why we have had ERISA fee litigation and intervention by the government in the form of the recent service provider and participant fee disclosure rules.

Tussey v. ABB, Inc. is an “excessive fee” case that came to a bad result for the employer after a month-long trial: $35 million in damages. This result was based on failures by the employer to monitor recordkeeping costs and negotiate for rebates and on a change from one investment fund to another that the judge felt had not been handled appropriately by the plan fiduciaries. Interestingly, the damages could have been 10 times that amount if the judge had accepted the plaintiffs’ argument that ABB’s breaches of fiduciary duty had “infected” all of its investment decisions. The plaintiffs had argued that the damages should be measured by reference to the alleged better investment performance of ABB’s defined benefit plan. The judge said that she was “suspicious,” but chose not to go there.

In Tussey, the recordkeeper had been selected in an RFP process based upon a per-participant hard-dollar fee.  ABB soon agreed to move from that per-participant fee to a revenue sharing-based compensation system. From the recordkeeper’s standpoint, this allowed the fees to increase with the assets of the plan (“fee creep,”as it is called), which ABB did not monitor. The recordkeeping fees soon crept far beyond their market equivalent.

In addition, the recordkeeper began doing other work for ABB at less-than-market costs, such as payroll, health plan recordkeeping and defined benefit and nonqualified plan administration. The judge concluded this work had been subsidized by the excess, above-market fees ABB paid in connection with its 401(k) plan.

After looking at all of the circumstances, the judge was strongly influenced by a number of factors:
 
  • ABB had violated its own investment policy statement, which required that all revenue sharing be used to reduce plan administrative costs for plan participants;
  • ABB never calculated what it was allowing the plan to pay the recordkeeper; and
  • ABB never attempted to leverage the plan’s size to decrease the fees it was paying, even after it was told by an outside consulting firm that it was overpaying and that it appeared the plan fees were subsidizing the corporate services provided to ABB by the recordkeeper, and even after the recordkeeper told ABB that it viewed its plan services and its corporate services to be interconnected.

The judge concluded that monitoring the overall expense ratio of the mutual funds offered in the plan was not sufficient on the part of ABB’s plan fiduciaries because monitoring at that level did not show what was being paid to the recordkeeper for its services, did not allow benchmarking of the recordkeeping fees against the market and did not reflect the benefit to the recordkeeper of having the plan on the recordkeeper’s investment platform. The judge concluded that the ABB fiduciaries “were not concerned about the cost of recordkeeping unless it increased ABB’s expenses.”

Further, the judge concluded that ABB had not changed funds for the legitimate reasons in ABB’s investment policy statement, but instead was motivated by a desire to decrease the fees ABB paid directly and to maintain the appearance that participants were not paying for administration of the plan.

Note that the recordkeeper was not found to be responsible to any degree for these breaches of fiduciary duty, even though:
 
  • The recordkeeper was tracking all of this;
  • The recordkeeper asked for additional fees in years when the account values had decreased and the revenue sharing was not covering its fees; and
  • The recordkeeper knew that the revenue it was generating per ABB plan participant far exceeded its revenue from other plans it serviced.

Using revenue sharing to pay plan expenses is certainly not a per se breach of fiduciary duty, but the judge noted that “the prudence of choosing that option must be evaluated according to the circumstances of each plan.”  In other words, the judge expected that the ABB fiduciaries would explore the specific circumstances of their plan and its relationship with its recordkeeper and not just accept the recordkeeper’s sales statements at face value.

The judge also emphasized that the individual ABB employee-fiduciaries owed their first duty to the participants, not to ABB.

The ABB plan fiduciaries learned their lesson the hard way.  In doing so, however, they have provided the rest of us with invaluable guidance on how a court might view the actions of employees and committee members who bear the responsibility of taking care of their company 401(k) plan and its participants.

For help in analyzing your plan’s fees and expenses and in determining what to do if you think you might have an “ABB problem,” call any member of the WNJ Employee Benefits Group.

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