Reversal in 401(k) case leaves plan sponsors on the hook

The reversal of the excessive 401(k) fee case against Fidelity Management Trust Co. showed that the onus of fiduciary responsibility and vendor oversight rests with the plan sponsor.

Moreover, the outcome of the case underscored that investment advisors need to help keep plan sponsors accountable to their retirement plan document.

That’s the word from global consulting firm Roland Criss following last week's big decision in the case.

The suit was filed in Missouri district court in December 2006, on behalf of more than 12,800 employees of ABB Ltd.

Fidelity Management Trust Co. and the U.S. division of generator maker ABB were accused of charging excessive 401(k) fees and breaching their fiduciary duty on many counts. Fidelity Trust acted as a trustee and record keeper. The district court ruled against both ABB and Fidelity, but the U.S. Court of Appeals last week let Fidelity off the hook for its role in the matter.

In its Jan. 5, 2010, decision, the district court found that ABB and its fiduciaries violated their fiduciary duties when they failed to monitor recordkeeping costs, failed to negotiate rebates for the plan from Fidelity or other investment companies that were part of the company’s retirement platform, selected more expensive share classes when less expensive ones were available and removed the Vanguard Wellington Fund and replaced it with Fidelity’s Freedom Funds.

The court also found that ABB and the employee benefits committee violated their fiduciary duties when they agreed to pay Fidelity an amount that exceeded market costs for plan services to subsidize the corporate services provided to ABB by Fidelity, such as ABB’s payroll and recordkeeping for ABB’s health and welfare plan and its defined benefit plan.

Fidelity breached its fiduciary responsibility when it failed to distribute float income solely for the interest of the plan and when it transferred float income to the plan’s investment options instead of the plan.

“Plan sponsors are being held liable if they do not sufficiently scrutinize their vendor arrangements and compensation,” said Roland Criss. The company pointed out that even though Fidelity’s fee arrangement of revenue sharing was questionable, the court blamed ABB for not having adequate measures in place to monitor that revenue sharing model.

And even though Fidelity’s compensation was too high for the services it provided, the court ruled that ABB did not regularly evaluate Fidelity’s value or compare any other providers’ offerings as a competitive benchmark.

ABB also did not stick to its retirement plan documents, Roland Criss said. Under the original agreement with Fidelity, the company charged a flat fee per participant, but then the company switched to a revenue-sharing model that was not outlined in the original retirement plan document.

The district court awarded $13.4 million against the ABB fiduciaries for failing to control recordkeeping costs and $21.8 million for losses the district court believed the plan suffered as a result of switching from the Wellington Fund to the Freedom Funds.

The district court awarded $1.7 million against Fidelity for lost float income and held the ABB fiduciaries and Fidelity jointly liable for more than $13.4 million in attorney fees and costs.

The Appeals Court ruled that Fidelity was not at fault, so it won’t have to pay $1.7 million to the plan participants or have to pay attorney fees. It remanded the decision about how much ABB should pay in fees back to the U.S. District Court for the Western District of Missouri.

Comments

Advertisement. Closing in 15 seconds.