401(k) Plan Management vs. Fiduciary Duties

Fees charged by record keepers and asset managers for 401(k) plan services paid from plan assets have come under greater scrutiny in recent years. The Department of Labor (DOL) has released fee disclosure regulations, and courts — from district courts all the way to the U.S. Supreme Court — have reviewed high-profile litigation over the issue. The topic isn’t likely to settle down anytime soon.

Plan trustee negligence

The U.S. Court of Appeals for the Eighth Circuit made headlines with a ruling earlier this year. In Tussey v. ABB Inc., ABB paid its record keeper, Fidelity Investments, for its services primarily through a fee-sharing arrangement, with asset management fees charged by the mutual funds used by the plan. Over the years, Fidelity provided additional administrative services to ABB unrelated to the plan. These services included processing ABB’s payroll and acting as record keeper for ABB’s defined benefit plans and health and welfare plans. Even though Fidelity incurred losses from these administrative services, it made substantial profits from the 401(k) plan.An outside consulting firm advised ABB it was overpaying for Fidelity’s recordkeeping services and warned ABB that the plan might be subsidizing the other administrative services Fidelity provided to ABB under the revenue-sharing agreement.

ABB employees sued their employer, claiming that Fidelity was charging excessive fees and ABB allowed it to happen. Among the plaintiffs’ other claims was that, when ABB’s plan trustees decided to eliminate one of the plan’s investment options and automatically funneled employee 401(k) assets from that fund into a new fund, the new fund chosen was a poor performer, causing those employees to lose money.

The district court found that ABB fiduciaries had violated their fiduciary duties to the plan. Both the ABB fiduciaries and Fidelity appealed the court’s decision. The appeals court agreed with the trial court’s award of $13.4 million in damages to participants because of a fiduciary breach by plan trustees.

Elements of neglect

The plan document gave ABB’s plan administrator “sole and absolute discretion to determine eligibility for, and the amount of, benefits under the Plan and to take any other actions with respect to questions arising in connection with the Plan, including … the construction and interpretation of the terms of the Plan.” Under this language, the courts then review the plan fiduciary’s decisions for an abuse of discretion, and defer to the fiduciary’s interpretation if a reasonable person could have reached a similar decision, given the evidence.

Using this standard of review, the appeals court upheld part of the trial court’s ruling, but reversed other parts. The court upheld the excessive fee allegations because ABB:

    · Hadn’t calculated the recordkeeping fees Fidelity charged the plan through the revenue-sharing arrangement,

    · Hadn’t attempted to determine whether those fees were reasonable because it hadn’t determined the amount of the fees,

    · Had failed to use its large size as leverage to negotiate a more competitive fee structure, and

    · Had failed to “make a good faith effort to prevent the subsidization of administrative costs of ABB’s corporate services” (which included services unrelated to the plan, such as payroll processing and recordkeeping for a separate retirement plan and its welfare plans).

However, the appeals court reversed the claim concerning the shifting of participant dollars after eliminating one of the fund choices. The court found that, by moving money out of a fund whose performance was deteriorating to age-appropriate target date funds, ABB had made a reasonable decision “given what it knew at the time.” Under the “prudent person standard,” courts review how the fiduciary acted at the time of the challenged decision, and not the decision’s results.

Lessons learned

The lesson for plan sponsors? Pay attention to proper fiduciary procedure — in this example, monitoring and evaluating fees. ERISA is as much about procedure as outcome. Had ABB analyzed the fees, and found a reasonable basis on which to conclude they weren’t out of line, the court’s conclusion may have been different.

Sidebar: DOL proposes requirement for guide to plan provider fees

ERISA fee disclosure regulations that took effect in July 2012 are supposed to help plan sponsors clearly understand charges for various retirement plan services. However, the required disclosures can be lengthy and cumbersome to interpret.

Thus, the Department of Labor (DOL) has proposed additional regulations that would require “covered service providers” to provide a guide to where fees can be located in their disclosure document. Not all covered service providers would be required to provide the guide — only those whose disclosure documents are excessively lengthy or are in multiple documents.

Under the proposal, the disclosure must contain a specific locator that identifies the document and where the information is located within the document. It must describe services to be provided, and include a statement concerning services to be provided as a fiduciary.

The fee disclosure document must also describe all direct and indirect compensation, any compensation that will be paid among related parties, compensation for termination of the contract or arrangement, and compensation for recordkeeping services. Finally, it must include the required investment disclosures for fiduciary services and recordkeeping and brokerage services, including annual operating expenses and ongoing expenses or, if applicable, total annual operating expenses.

The requirements will take effect one year after final revisions are made to the proposed regulations.

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