ABB and Fidelity lose in court after mismanaging the company 401(k).
The long awaited decision in the Tussey v. ABB case was released on March 31st, with both defendants (ABB and Fidelity) ordered to compensate the plaintiffs.
A federal lawsuit accused ABB and its pension-review committee of allowing their 401(k) accounts to include investment options that contained “unreasonable and excessive” – as well as undisclosed – fees and expenses. The case even sparked a shooting rampage at an ABB plant.
While ABB and Fidelity may appeal, this landmark decision is a warning to corporate pension managers – many of whom are treasurers sitting on their company’s pension committees. In a previous article, IT highlighted the Department of Labor’s more intense scrutiny and stricter disclosure requirements, which have been partly driven by this lawsuit and others that are pending.
The $1.7 million fine imposed on Fidelity is but a small penalty to pay for the investment company. However, ABB and its retirement plan managers were found to have cost plan participants more than $35 million due to their fiduciary lapses and are on the hook for the much larger sum. The company has been ordered to compensate the plaintiffs accordingly.
The company’s liability was two-fold. First, the firm and its retirement plan managers failed to control record-keeping fees and didn’t pursue rebates together totaling $13.4 million. Second, they lost $21.8 million by approving the transfer of assets from an existing competing fund to Fidelity Investments in an apparent revenue-sharing arrangement. The court ruled this was done for the company’s own benefit at the expense of the employees.
Fidelity served as the record-keeper for the plans and Fidelity funds were also offered as investment options. ABB must now conduct a competitive bidding process to select a new record keeper for its plans. The company also is prohibited from allowing the plan to provide corporate services (in this case ABB’s payroll was run by Fidelity).
“What was noteworthy of the court’s decision is that Fidelity’s fine is significantly less than the plan sponsor,” said Lyle Himebaugh, managing partner at Granite Group Advisors. “ABB was fined $35 million for failure to monitor costs and negotiate revenue sharing. They could have used an independent consultant who had ABB’s best interests [in mind].”
And independent consultant may be what’s needed as employees nowadays are demanding more fee transparency. They also want better disclosure to ensure that their retirement money is being handled fairly and that the corporation is not benefitting at their expense. Independent investment firms like Granite are better positioned to meet investor 401(k) needs at a lower cost, with full transparency and fiduciary responsibility.
Treasurers who have fiduciary responsibility for managing retirement funds need to understand the widespread impact and legal implications of their decisions and those of the pension boards on which they sit. Failure to monitor record-keeping costs to make sure they are reasonable, failure to negotiate with only the plan’s participants in mind, and accepting kickbacks or engaging peripheral services provided by the investment fund company all are red flags. These practices will increase the risk of violating the company’s fiduciary responsibilities and as we’ve seen, will be hard to defend in court.