A recent case, Tussey v. ABB, Inc., has received much warranted and unwarranted attention in the Section 401(k) plan arena. In Part 1 of this legal update, we will explain the basics of what happened in this case. In Part 2, we will provide practical aspects of Tussey and deliver specific recommendations on how plan sponsors and fiduciaries can help minimize their potential fiduciary liability.
Part 1: Case Summary
By way of background, this case was one of 15 different cases filed in 2006 by a single law firm. These lawsuits were aimed at large employers alleging a breach of fiduciary duties under ERISA related to the fees paid for 401(k) plan services. The primary issue in Tussey was whether ABB, Inc., the plan’s employee benefits committee, and Fidelity Trust (the plan’s recordkeeper) violated their fiduciary duties to the plan. Tussey is noteworthy because it the first of these cases to award significant damages to the plaintiffs (but note that the damages were a fraction of those sought).
The district court certified the case as a class action in 2007. The district court refused to dismiss the case in 2008, while also ruling that the failure to disclose revenue sharing payments to plan participants is not a breach of fiduciary duty (because disclosure is not explicitly required by ERISA or the DOL). The case proceeded to a four-week bench trial. Finding in favor of the plaintiffs, the court awarded damages of nearly $37 million. While the court found a number of deficiencies in ABB, Inc.’s fee monitoring procedures and in the fee arrangement between ABB, Inc. and Fidelity, it is clear that ABB, Inc.’s primary lapse was in not following its detailed investment policy. The court issued the following significant holdings:
- ABB, Inc. failed to monitor recordkeeping costs by:
- Never calculating the amount paid via the revenue sharing arrangement.
- Ignoring third-party advice that revenue sharing exceeded market rates.
- Using the revenue sharing to decrease administrative costs, which ultimately benefited ABB, Inc.
- ABB, Inc. breached its fiduciary duty under ERISA by not considering its ability to leverage the plan’s size and not negotiating lower fees for plan participants as was required under investment policy.
- ABB, Inc. violated its fiduciary duty under ERISA by:
- Removing the Wellington Fund and replacing it with the Fidelity Freedom Funds.
- Failing to follow the plan’s investment policy, which described investment selection/de-selection processes.
- Decreasing ABB, Inc.’s out-of-pocket costs for recordkeeping fees (as opposed to getting lower costs for plan participants).
- ABB, Inc. and the benefits committee violated their fiduciary duties under ERISA by:
- Agreeing to pay Fidelity an amount that exceeded market costs for plan services.
- Having the 401(k) plan subsidize ABB, Inc.’s corporate services, such as payroll and recordkeeping costs for its health plan and pension plan.
- Ignoring reports indicating that ABB, Inc. overpaid for services and that payments subsidized services for ABB, Inc. corporate plans.
- The trustee and recordkeeper (Fidelity Trust) breached fiduciary duties by transferring float income earned on plan assets to plan investment options rather than distributing it to plan participants.
Part 2: Practical Aspects and Recommendations
As a preliminary note, we would recommend that plan sponsors and fiduciaries not overreact to this case. Some commentators are being rather alarmist in the wake of Tussey. They are claiming that the holdings in this case will leave plan sponsors and fiduciaries nowhere to hide, and that every 401(k) plan with mutual fund investments is filled with eventual plaintiffs who are planning lawsuits. We would caution that there are many published cases with similar fact patterns to Tussey that have not found any type of breach of fiduciary duties under ERISA. In addition, we would expect ABB, Inc. and Fidelity to appeal this case. So, some of the holdings in this case may ultimately be reversed.
Conversely, we would recommend that plan sponsors and fiduciaries not disregard this case. Some institutions in the industry are basically recommending that people ignore Tussey. Even if another plan’s fact pattern is much different than the situation described in Tussey, this case presents an important reminder that ERISA imposes high standards of fiduciary duties, and the liability for failing to maintain those standards can be significant. In addition, the real problem is that sometimes bad facts, like those presented in Tussey (e.g., ABB, Inc.’s clear disregard of its investment policy), can create bad law. Accordingly, we think that it is advisable to prepare as though litigation may be around the corner.
Rather than overreacting or disregarding this case, we believe that the best advice is somewhere in between. We suggest that the facts and analysis in Tussey provide some important lessons for plan sponsors and fiduciaries of 401(k) plans with mutual fund investments:
- Plan fiduciaries must exercise prudence when making investment-related decisions by:
- Engaging in a thorough decision-making process;
- Following the terms of the investment policy when making decisions; and
- Thoroughly documenting the basis for all investment decisions.
- The Tussey decision was largely driven by the fact that this plan had $1 billion in assets and by the very specific investment policy statement provisions. Nevertheless, the court indicated that ABB, Inc. should have taken additional steps in reviewing the revenue sharing arrangement. Note that these steps are not explicitly required by the DOL regulations, and one might argue that much of this information is generally not available, and that these steps are not required by other plan fiduciaries. Nonetheless, Tussey suggests that plan sponsors and fiduciaries should press service providers/recordkeepers to provide enough information about revenue sharing arrangements to allow them to:
- Calculate total revenue sharing paid to service providers;
- Determine the plan administrative costs that would be charged in the absence of revenue sharing;
- Compare to the level of plan administrative costs paid by plans of comparable size;
- Determine whether revenue sharing payments provide the service providers/recordkeepers with compensation beyond the administrative cost in the absence of revenue sharing (i.e., beyond the “market rate”); and
- Negotiate rebates of revenue sharing that exceed the market rate.
- Press service providers/recordkeepers to provide better mutual fund share classes (with lower fees for participants) or credit revenue sharing back to the plan for the benefit of participants.
- Plan sponsors and fiduciaries should consult with legal counsel to examine their overall level of fiduciary risk by:
- Determining if administrative procedures are in line with “best practices”; and
- Revising investment policies to make sure they are not creating potential liability, like they did in Tussey. ABB Inc.’s primary failure was in not following its very detailed investment policy (which raises the question as to whether “less is more” with regards to investment policies). To avoid these issues, plan sponsors and fiduciaries should make sure that their investment policies are up-to-date and consistent with actual procedures.