With all the recent attention in the press and by the Department of Labor on who is a fiduciary and what a fiduciary needs to do, you may wonder if you have waited too long to focus on this issue.  While the March 2012 opinion by the Federal District Court for the Western District of Missouri in Tussey v. ABB, Inc., found that it was too late for the plan fiduciaries for the two ABB Inc. 401(k) plans to fix their mistakes, the opinion should serve as a wake up call to other 401(k) plan fiduciaries to change their fiduciary ways before it is too late for them.

The court found that the ABB defendants (the ABB Pension Review Committee, the ABB Employee Benefits Committee and John Cutter, the Director of ABB’s Pension and Thrift Management Group) were jointly and severally liable in the amount of $35.2M for breaches of various fiduciary obligations including:

  • Fiduciary obligation to act in best interest of plan participants as evidenced by:
    • Failure to understand and calculate the revenue sharing fees paid to Fidelity
    • Failure to determine whether Fidelity’s fees (particularly in light of the revenue sharing) were reasonable and overpaying for those services
    • Failure to engage in any process to assess whether the revenue sharing model was in the best interest of plan participants.
    • Ignoring the recommendations of a third-party consultant hired by the ABB defendants regarding Fidelity’s fees.
  • Fiduciary obligation to follow plan documents as evidenced by:
    • Failure to follow the plans’ Investment Policy statement regarding:  (i) use of cost saving rebates from plan investments (the policy required rebates to be used to effect administrative services; however, in actual practice, rebates were paid to Fidelity), and (ii) the process for replacing investment funds.  

Make Sure Plan Documents Say What They Mean
and Fiduciaries Follow What They Say

The court also found that the Fidelity defendants were jointly and severally liable in the amount of $1.7M for breach of their fiduciary obligations by failing to use the income generated by “float” (interest earned on plan assets held in cash management accounts overnight pending plan transactions such as investment of contributions, intra-fund transfers, distributions) for the benefit of plan participants.  This ruling on the character of the float as a plan asset is of particular importance since many third party administrative agreements expressly permit the third party record keeper to use the float.  This practice would, in light of Tussey, appear not to be permissible.

It’s not too late for your 401(k) fiduciaries.  The Tussey case provides a number of key learnings for plan fiduciaries:

  • Understand the third party administrative fee arrangements.  This is particularly timely and important in light of ERISA’s new fee disclosure rules.
  • Follow plan documentation, including investment policies, and periodically review these documents to ensure that they are up-to-date and consistent with administrative practice.
  • Periodically benchmark the fees and fee arrangements with third party service providers.
  • Make sure your service agreements treat “float” earned in plans as plan assets for the benefit of plan participants.