As expected the new Department of Labor (DOL) rules on fee disclosures for retirement plans went into effect in 2012 and plan statements included fees for the first time starting with third-quarter reports. Despite the move toward transparency driven by new legislation for employer retirement funds and some hard lessons learned from recent verdicts, past actions still haunt the industry as new legal claims are filed.
Treasurers that sit on pension boards have a fiduciary responsibility and should be aware of the recent litigation and legal decisions. You remain at risk and possible exposure to litigious claims as well as potential lost plan income due to company plan managers’ assumptions regarding float income and fees.
In the Tussey vs. ABB case of nearly a year ago (and currently being appealed by Fidelity, the asset manager, and the co-defendants), fault was found for the mismanagement of ABB’s 401(k) plan, including the excessive fees charged for management services. In a prior article, “DOL, Lawsuits on Fees Drive 401(k) Changes” iTreasurer cited another pending class action, the $20 million suit against Ameriprise Financial, which emphasized the fiduciary responsibility of pension management. It also highlighted how these lawsuits have driven new disclosures laws and, ultimately, a new environment where corporations are seeking greater transparency and trust in the firms who manage their retirement funds.
Large funds managers acknowledge that they have been operating for years under assumptions that they believe to be industry acceptable. Allocations of float income and management fees are two such contested areas. Built around and ingrained in complex structures, and formerly undetectable and practically immeasurable, these grey areas are now under fire by clients and participants alike who are paying a great deal more attention to details.
Plan Participants and Sponsors Sue for Mishandling of Float Income.
The most recent filing (February 2013) is related to the Tussey case and contests the treatment of float income. In this latest suit, which was filed in US District Court (Massachusetts) and involves three plaintiffs participating in separate plans (Hewlett-Packard, Avanade – (a subsidiary of Accenture), and Delta, a class action status is being sought opening the door for more claimants. According to a recent article on retirement benefits resource web site, Plansponsor.com, the plaintiffs allege that Fidelity “improperly used float income from interest bearing accounts earned from the time a participant requested disbursement to when it was actually disbursed. The plaintiffs alleged that the interest is part of plan assets and that Fidelity paid itself trust and record keeping fees beyond the authorized agreements.”
Basically, by paying itself float income, Fidelity breached its fiduciary duty. And the cost of mismanagement is high;with one plaintiff attorney quoted as saying it could be as much as $2 billion attributable to this float income which was used to offset fees. Lyle Himebaugh, Managing Director of Granite Group Advisors, an independent investment advisory firm, noted that the “issues are major.” Mr. Himebaugh emphasizes the importance of prior litigation and this new class action suit, “This is big and they will fight (this) to the death.”
If You Sit on a Committee, Take Notice
The question your company’s pension committee should be asking is if they should continue to do business with partners that may have trouble meeting 100 percent disclosure requirements. How quickly can these plan manager’s complex fee structures be reconfigured to meet the new rules and are they changing their internal processes? The amount of resources needed to meet these internal challenges as well as to fight litigious actions for years in the courts will be draining. And we may be seeing only the tip of the iceberg.
The pension management industry is going through a shake-up in many ways and it is smart to keep up with the outcomes of the legal wrangling and any potential impact on company retirement plans and your company’s exposure.If entrusted with making decisions on your company’s retirement plans, you can reduce your risk of legal action by ensuring plan costs are in control and fully disclosed, and by using trusted and proven providers who strive for full transparency.