Retirement plan fee disclosure is sure to be saturated with litigation and resulting class-action settlements. Why? Because it’s cheaper to settle than to keep arguing.
Such a settlement, Tussey v. ABB, Inc., which CFO magazine is calling the “first class action over 401(k) fees to be tried and decided on its merits,” just happened not long ago in a Missouri federal court.
According to the court, ABB, a manufacturer of power and automation equipment, violated their fiduciary duties to the defined contribution plan and its participants when they failed to monitor recordkeeping costs and negotiate for rebates from Fidelity Trust, a recordkeeper that’s part of Fidelity Investment’s family of service providers.
The company will have to pay out $35.2 million as a result.
Defendants in the case are multiple parties representing the plan, which include the employer, the named fiduciary, the company’s committee appointed to oversee all employee benefits, Fidelity Trust (recordkeeper) and Fidelity Research (investment advisor to the Fidelity mutual funds offered by the plan).
The case, which went on for a month, centered on the justification for and monitoring of how the plan sponsor chose to provide payment to Fidelity and the sponsor’s failure to closely examine recordkeeping fees.
Over time, according to court documents, Fidelity Trust was paid primarily with “revenue sharing” – a little known practice by which 401(k) providers “share” what they earn with recordkeepers, broker/dealers and TPAs, and it’s considered “administrative” payments. Before fee disclosure, this type of fee payment was mostly hidden to employers and plan participants.
There are a couple potential areas of caution when it comes to revenue sharing. One, is that the fiduciary needs to know the amount of revenue sharing, know the reasonable costs, and reclaim the difference for the plan and its participants if it’s too high. The other pitfall comes when the broker or TPA may recommend mutual funds that pay higher compensation, essentially putting themselves ahead of the best interests of the plan and plan participants.
In the case of ABB, Fidelity Trust’s fee rose as the plan assets grew, which raised the revenue sharing, even if Fidelity Trust provided no extra services. If the plan’s assets declined, the fee would decline, but the court ruled, “when there was a concern by Fidelity that revenue sharing would decline, Fidelity asked for hard-dollars to make up the difference.”
In the end, the case was settled based on three reasons, according to CFO: “(1) failing to monitor the recordkeeping fees and revenue-sharing payments made to the plan’s trust company, (2) failing to negotiate rebates to offset or reduce the cost of providing administrative services to plan participants, and (3) replacing an actively balanced mutual fund with the trust company’s target date fund that generated more in revenue sharing for the trust company.”
Unless you’ve been severely out of touch, this shouldn’t be a wake-up call. But it’s one of several bellwethers for continued fiduciary investigations. Stephen Miller, Counsel at McDermott Will & Emery LLP tells FiduciaryNews.com:
“For years,” he says, “many plan sponsors decided the potential for liability on ‘stock drop’ cases outweighed the possibility of ultimate victory, which resulted in numerous multi-million dollar settlements in breach of fiduciary duty lawsuits. This string of settlements created an environment where suits against 401k plans could be very profitable for plaintiffs’ lawyers, and in part spawned the next string of lawsuits involving breaches of fiduciary duties, this time related to administrative fee offerings.”