In Tussey v. ABB, Inc., a U.S. District Court in Missouri recently awarded class action plaintiffs $37,000,000, finding that the defendants breached their fiduciary duties, in part, by having two 401(k) plans pay excessive fees to its service provider. For employers, other plan fiduciaries, and service providers of defined contribution plans, this $37,000,000 award should serve as a wake-up call.

Background

The Tussey plaintiffs are class representatives of participants in two nearly identical 401(k) plans: one for ABB, Inc. (“ABB”) non-union employees and one for ABB union employees. The Tussey defendants include ABB, its employee benefits committees, Fidelity Management Trust Company (“Fidelity”), and an affiliate of Fidelity. As described by the Court, Fidelity was originally “paid a per-participant, hard-dollar fee” for its services. Over time, Fidelity was “primarily paid with ‘revenue sharing.’” Its relationship with ABB, however, was not limited to the 401(k) plans. Fidelity prepared payroll for all ABB employees and did the recordkeeping for several other ABB employee benefit plans.

ABB Paid Fidelity Too Much

The Court found that ABB failed to monitor the 401(k) plans’ recordkeeping fees paid to Fidelity and failed to negotiate with Fidelity to have the revenue sharing from mutual funds rebated to plan participants’ accounts. According to the Court, “ABB never calculated the dollar amount of the recordkeeping fees the Plan paid to Fidelity Trust via revenue sharing arrangements, nor did it consider how the Plan’s size could be leveraged to reduce recordkeeping costs.” From 2001 to 2008, the 401(k) plans each year paid amounts that varied from $65 to $180 per participant. The Court found that annual per participant fees of $44 to $70 would have been reasonable.

ABB adopted an Investment Policy Statement (“IPS”) for the 401(k) plans. The IPS provided that revenue sharing rebates would “be used to offset or reduce the cost of providing administrative services to plan participants.” The Court held that the IPS was a “governing plan document” for the 401(k) plans and that, because ABB did not investigate how much the revenue sharing generated and did not use the revenue sharing to reduce the cost of administrative services for the 401(k) plans, ABB breached its fiduciary duties. The Court made clear, however, that using revenue sharing to compensate a recordkeeper is not by itself imprudent.

ABB Paid Fidelity Fees to Subsidize Other Services

The Court discussed a report from ABB’s consultant, Mercer, “that opined that the [401(k) plans were] subsidizing” Fidelity’s other services for ABB. The Court found that, by allowing Fidelity to generate excessive revenue sharing based on the 401(k) plans assets, ABB violated the IPS and used the revenue sharing to subsidize Fidelity’s payroll and other services. The Court found ABB liable based on one ABB employee’s knowledge and failure to investigate. The Court did not find the ABB committees nor the named ABB individual defendant liable, based on their lack of knowledge. The Court did not find Fidelity liable, due to Fidelity’s not having negotiated these arrangements as a fiduciary.

Fidelity Misapplied Float Income

The Court found that Fidelity misapplied float income to the 401(k) plans’ investment options instead of to the 401(k) plans. The Court found that Fidelity managed the float income process and thus was a fiduciary for the income generated by plan assets. With the float income, Fidelity pays its recordkeeping and administrative expenses and “any remaining float is then distributed pro rata among individual investment options that choose to receive it.” Therefore, the float income “goes to the benefit of all shareholders of the investment option” and the float “interest generated by Plan assets are not disbursed solely to Plan participants and beneficiaries.” (As an aside, Fidelity probably could have properly retained the float income for itself with the proper disclosures to the fiduciaries based on Department of Labor Field Assistance Bulletin 2002-3.)

$37,000,000 Judgment

Against the ABB defendants, the Court awarded $13.4 million for their failure to monitor recordkeeping costs and $21.8 million for the funds lost due to the improper mapping of funds. With regard to Fidelity, the Court found that the plaintiffs were deprived of $1,294,388 in float income; using the S&P 500 index to adjust for lost investment opportunity, the Court determined that the 401(k) plans suffered losses of $1.7 million.

The Court also entered injunctive relief. It ordered ABB (1) to use a competitive bidding process to select a new recordkeeper, with Fidelity permitted to participate, (2) to monitor recordkeeping costs and to negotiate market rates, including rebates if ABB used revenue sharing to compensate the recordkeeper, (3) not to use the 401(k) plans’ recordkeeper for other services, and (4) to choose the share class of investments with the lowest expense ratio. Finally, the Court ordered Fidelity not to transfer float income to any entity other than the 401(k) plans, unless expressly permitted to do so by an agreement.

Lessons from the Ruling

The fundamental lesson from the Court’s ruling in Tussey is that plan fiduciaries should act prudently and for the exclusive benefit of the plans’ participants and beneficiaries in dealing with its service providers. Specific lessons for fiduciaries include the following:

  • Monitor and investigate plan expenses
  • Negotiate plan fees and revenue sharing
  • Follow the plan documents (including any investment policy)
  • If a service provider provides other non-plan services, make sure the plan fees are not subsidizing the other services
  • Obtain disclosures on and evaluate float income