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Oct 26 2012

Plan Fiduciaries Liable for Excessive Investment Fees and Imprudent Investments

In one of the first 401(k) fee class action cases to be decided on the merits, the U.S. District Court for the Western District of Missouri recently ruled in Tussey v. ABB, Inc., that 401(k) plan fiduciaries breached their ERISA fiduciary duties by failing to monitor recordkeeping costs and revenue-sharing payments, selecting more expensive share classes when less expensive options were available, replacing an investment fund in violation of the plan’s Investment Policy Statement, and paying an amount to the recordkeeper in excess of the value of its services in order to subsidize the cost of other services provided by the recordkeeper to the company. 

In considering the claims that ABB breached its fiduciary duty to monitor by not calculating the dollar amount of the recordkeeping fees paid to the recordkeeper (Fidelity) through revenue sharing agreements, and not considering how the plans could use their size to reduce recordkeeping costs even though the Investment Policy Statement specifically required them to do so, the court noted that the plan fiduciaries were not able to prudently analyze the arrangement. 

Although issued by a lower court, this decision underscores the importance of plan fiduciaries fully understanding the fee arrangements entered into with service providers.  To this end, a thorough analysis of the service provider fee disclosures that are required to be provided to plan administrators under Section 408(b)(2) of the Internal Revenue Code by July 1, 2012, will be of utmost importance. 

Please let us know if you have any questions concerning the sufficiency of service provider fee disclosures that you received, or any other employee benefits matter.