In prior entries, I have talked about the new fee disclosure rules and also how they would impact plan sponsors. Coupled with these disclosures is the underlying issue of whether a plan sponsor breaches a fiduciary duty by failing to monitor fees and actively pursue the opportunity to reduce fees to plan participants. Well, now we have a court decision that pretty well clears that up.
In Tussey v. ABB, Inc., which recently came out of the Western District of Missouri, the Court found that a plan sponsor breached its fiduciary duty to plan participants because it failed to monitor record keeping fees and revenue-sharing payments and paid record keeping fees in excess of the market cost to subsidize other record keeping services. Factually, ABB sponsored two 401(k) plans that offered Fidelity Investments mutual funds as investment options. Fidelity was also the investment adviser and the record keeper. Fidelity then used some of those fees to offset losses it was taking on other services provided to ABB. There were other issues related to investment options as well, but the key consideration here was the excessive fee issue.
While revenue sharing can be used to pay for plan record keeping services, the Court felt that by not actually calculating the amount that was generated by revenue sharing for Fidelity, ABB could not properly analyze how revenue sharing would benefit the plans and could not use the relative size of the plan as leverage to offset or reduce record keeping costs. So by failing to make a "meaningful effort" to monitor revenue sharing payments and insure that revenue sharing payments were actually being used to reduce record keeping costs, ABB breached it's duty to defray expenses. Plus, using the revenue sharing arrangement to offset other costs was completely inappropriate because it resulted in the plans paying above market rate for the record keeping services generally. All told, the liability was more than $13 million, which is a pretty hefty penalty.
Certainly the facts of this case suggest there was something fishy about the arrangement. However, it was not a development that occurred overnight and you can imagine how, over time, minor decisions related to costs and fees can compound into major problems for plan sponsors. Plan sponsors should make themselves keenly aware of what fees and expenses can and cannot be charged to the plan and also make inquiries about the reasonableness of fees. This case also serves as a reminder that regular review of fees (monitoring) is an important component of satisfying that fiduciary obligation and your plan should be reviewed on a regular basis to see if (1) you are being charged the correct amounts under your agreements, (2) those amounts are reasonable and (3) there are ways to reduces those fees. Otherwise, you might end up paying back the plan.