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Friday, April 27, 2012

At the end of last month, Judge Laughrey handed down her decision in Tussey v. ABB, Inc. (W.D. Mo., No. 2:06-CV-04305). In their simplest recitation, the facts of Tussey v. ABB are that ABB selected Fidelity to provide not only recordkeeping and other administrative services to its 401(k) plans, but also certain investment management services through one of Fidelity’s affiliates. During the time period at issue in this lawsuit, Fidelity also provided services to ABB in other capacities, including recordkeeping services for ABB’s defined benefit plan, non-qualified deferred compensation plan, health benefits, and payroll services (collectively referred to as “corporate services” by the court). Plaintiffs brought claims on behalf of a class of present and former ABB employees who are participants in ABB’s 401(k) plans alleging various breaches of fiduciary duties on account of ABB’s relationship with Fidelity, ABB’s management of the plans and Fidelity’s treatment of “float” income (i.e., earnings resulting from the short-term investment of funds held in accounts used to facilitate benefit plan transactions).

Following a four-week bench trial which concluded in January 2010, Judge Laughrey issued an 81-page decision on March 31st finding that the ABB Defendants (hereinafter “ABB”) and Fidelity Defendants (hereinafter “Fidelity”) each breached certain of their fiduciary duties under ERISA. Specifically, the Court found that the: (1) ABB violated its fiduciary duties by (i) failing to monitor recordkeeping costs, (ii) failing to negotiate rebates from either Fidelity or other investment companies utilized on the plan’s investment platform, (iii) selecting more expensive share classes for the plan’s investment platform when less expensive share classes were available, and (iv) removing the Vanguard Wellington Fund and replacing it with Fidelity’s Freedom Funds (i.e., Fidelity’s target-date retirement product); (2) ABB and its Employee Benefits Committee violated their fiduciary duties by paying Fidelity an amount that exceeded “market costs” for plan services in order to “subsidize” the corporate services provided to ABB by Fidelity; (3) Fidelity breached its fiduciary duties by failing to distribute “float” income solely for the interest of the plans’ participants and beneficiaries; and (4) Fidelity violated its fiduciary duties by transferring float income to the plans’ investment options rather than the plans themselves.

ABB “Take-Aways”:

While the court did find multiple breaches of fiduciary duties, those findings were largely based on ABB’s detailed investment policy statement (“IPS”) which mandated that the plan’s fiduciaries undertake certain specific actions (e.g., when multiple mutual fund share classes were made available, ABB was required to choose the share class with the lowest “cost of participation”). In fact, while Tussey v. ABB may be noteworthy because it the first “401(k) fee case” to award significant damages to the plaintiffs, it may be more noteworthy for some of the arguments it rejected and for some of the reasons it declined to assess liability. Some of the most interesting “take-aways” from the case include:

  • The court specifically states that a plan may choose revenue sharing as its model for compensating its recordkeeper and, perhaps more importantly, recognized that the use revenue sharing arrangements is not per se imprudent.
  • The court did not find that there was a duty to disclose revenue sharing to participants.
  • The court recognized that a common method for determining the reasonableness of those fees is to examine the expense ratios of various investments (but also found that this method was not sufficient in ABB because of ABB’s IPS).
  • The court declined to find that there was a duty for a large plan to offer separate accounts and/or co-mingled funds. In fact, the court recognized that even if separate accounts might be more cost effective, it was not imprudent for a plan fiduciary, such as ABB, to also weigh other factors, such as SEC oversight and the method of reporting asset valuation, in deciding what investment options to offer in a plan.
  • The court ruled that ERISA fiduciaries are not required to make the “best choice”, just a prudent choice.

Important Reminders:

The Tussey v. ABB decision will by no means radically alter the litigation landscape or benefit plan governance. Nevertheless, the decision offers a good reminder of certain “best practices” for plan fiduciaries. Some of these best practices include:

  • Ensuring that the plan is operated in compliance with its plan documents (which, according to ABB, may include the IPS).
  • Establishing thoughtful decision-making processes for selecting and monitoring plan service providers and plan investment options. (And, following that process.)
  • Periodically reviewing investment processes against the IPS the ensure consistency (or consider retaining an investment fiduciary to perform this function). For example,
    • Ensuring that the addition or removal of a fund complies with the IPS’s designated procedures.
    • If the IPS contains a policy for monitoring managers or placing them on a “watch list”, following such policy.
    • Using experts as appropriate, but evaluating their input pursuant to fiduciary process (e.g., give expert input due consideration and appropriately document the ultimate decision).
  • Thoroughly documenting the basis for all fiduciary decisions in meeting minutes or otherwise.

 

 

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