As reported in the February 2012 edition of For Your Benefit (see “The Final Fee Disclosure Rules Finally Arrive” by Daniel Kuperstein and Harvey Katz), the United States Department of Labor recently issued the final fee disclosure regulation to ERISA. The purpose of the regulation is to ensure that plan sponsors and fiduciaries of ERISA retirement plans have the fee information necessary to enable them to fulfill their obligations under ERISA of determining both the reasonableness of compensation paid for and the potential conflicts of interest that may affect the performance of those services provided to a plan.
While the regulation does not go into effect until July 1, 2012, and the effects of the regulation (and its companion regulation under ERISA section 404(a)(5), which is effective August 30, 2012, that requires the plan administrator to provide certain fee disclosures to plan participants) may not be seen for several years, one recent case has cast a spotlight on what could be called the poster child for bad fiduciary behavior and illustrates the consequences to plan fiduciaries who do not understand or take seriously their duties to plan participants.
In that case, Tussey v. ABB, Inc., the Court found that the plan fiduciaries breached their duties to the plan participants of two 401(k) plans sponsored by ABB, Inc. and were jointly and severally liable for $35.2 million in damages to the plan participants. In addition, the service providers were ordered to pay the plans $1.7 million for lost float income.
In brief, the court found that the fiduciaries (both service providers were found to be fiduciaries to the plans) breached their duties to the plan participants by:
- Failing to monitor recordkeeping fees paid through revenue sharing and cash payments;
- Failing to use the plans’ size to negotiate rebates for the plans;
- Failing to prudently deliberate when de-selecting and selecting investments options;
- Failing to select less expensive share classes than those selected for inclusion in the 401(k) plans’ investment options;
- Subsidizing corporate expenses through revenue sharing with the 401(k) plans; and
- Improperly utilizing float income.
Although the list set forth above is a just a short summary of Tussey and its findings, at least 10 things fiduciaries should do can be gleaned from the case:
- Understand and follow the terms of the plan’s governing documents;
- Act only on behalf of the plan and its participants – leave your corporate hat on the shelf;
- Know the who, what, when and how much when paying for services to the plan;
- Benchmark the fees the plan is paying for investments;
- Monitor recordkeeping and other fees for the administration of the plan;
- Implement and follow written procedures for selecting/de-selecting an investment option;
- When available, choose less expensive share classes of the selected investment options;
- Seriously consider and investigate reports that the fees paid by the plan may be subsidizing corporate services;
- Consider having an independent advisor periodically review plan operations and administrative processes; and
- Document! Document! Document!
When navigating the new regulations and working through the regulatory compliance issues with respect to fee disclosure, we strongly recommend the use of experienced benefits counsel. Your Fox Rothschild benefits team is available to help you work through this minefield of fee disclosure regulations.