Attention all Plan Fiduciaries: Monitoring your Retirement Plan Vendor is a Big Deal

Last Updated: May 06, 2012

In November 2009, I wrote about the “first set of teeth” that bit into the 401(k) fee lawsuit landscape when Caterpillar, Inc. announced they would settle their 401(k) fee lawsuit.  Now we have a class action 401(k) fee lawsuit that has been tried with a decision, which finds the defendants liable for over $35 million. In Tussey v ABB, Inc., the Western District of Missouri Central Division Court found that ABB violated their fiduciary duties to the Plan in several areas including failing to monitor the retirement plan vendor fees and revenue sharing, and allowing the Plan to subsidize other corporate services received by ABB from their vendor, Fidelity. Failure to monitor the retirement plan vendor costs Fidelity began providing services to ABB in 1995; however, beginning in 2001, ABB did not monitor the vendor’s fees and did not calculate the amount of compensation that was received by Fidelity through revenue sharing.  The bottom line from this case is the arrangement ABB had with Fidelity was not reasonable. 
One recurring theme in the case was the importance of implementing and following a prudent process.  An example the Court gave was if a fiduciary opts to use revenue sharing, “It must also have gone through a deliberative process for determining why such a choice is in the plan’s and participants’ best interest.” If the plan sponsor pays for all plan expenses, then the fiduciaries do not have the fiduciary responsibility to monitor plan expenses.  However, this rarely happens, and the duty to act prudently is a central responsibility of the plan fiduciary as they are spending money that ultimately would have been in participants’ accounts. This is true when the plan pays for expenses through a direct charge to participant accounts or through the use of indirect compensation like revenue sharing. The Plan subsidized non-plan related services ABB also violated their fiduciary duties to the plan when paying Fidelity an amount that exceeded market costs and received other non-plan related services from Fidelity—basically, the Plan subsidized other services.  The court cited services such as payroll services and recordkeeping for the health and welfare plan and a defined benefit plan. I wonder if other plan sponsors receive “free” or reduced rates for other goods or services based on the profitability of the plan.  Has a nonqualified plan with executives ever received discounted pricing based upon the pricing of the plan with non-executives?  Has a bank ever provided better loan terms when the retirement plan was involved?  How many steak dinners, golf games, ball game tickets and trips to “conferences” are furnished because the retirement plan is ultimately subsidizing them? This may be a little harder to prove than what happened in the ABB case, but at the heart of ERISA, it is important to understand that you cannot use participant’s money for personal or corporate gain. “Do Over” When we were kids, we used to call for a “Do Over” and we would have the opportunity to redo something we just did. The decision in Tussey v ABB, Inc. is based upon the defendant’s liability due to the lack of oversight related to vendor fees and revenue sharing.  Fidelity provided information to ABB regarding fees and revenue sharing.  However, a plan fiduciary cannot rely on a conflicted retirement plan service provider who is not a fiduciary to be responsible for decisions.  ABB needed to conduct their own evaluation and make a determination based upon prevailing market conditions. Talk about a “wish I had this to do over again” situation.  Every company has a limitation when it comes to time and money.  However, after reading Tussey v ABB, any plan fiduciary could easily assess that a prudent due diligence process to monitor and evaluate would have saved a tremendous amount of time and money on ABB’s part and would have greatly benefited the participants for which the Plan ultimately exists. PCI’s archived blog entries are dated, the rules and statutes referenced may have changed. The analysis or guidance within these blog entries may have become stale, dated, or no longer accurate. PCI will not update or change these entries to reflect the latest analysis or development.


Chris Thixton, QPA, Principal



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