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THE FIDUCIARY CORNER: Costly Fiduciary Breaches in 401(k) Fee Case Provide Many Lessons

A recent decision handed down by a Missouri federal trial court has been the focus of the 401(k) world – and a costly reminder of the importance of strictly adhering to the many duties ERISA imposes on plan fiduciaries.  Tussey v. ABB, Inc. was the first case to go to trial out of a series of lawsuits filed over the past few years challenging 401(k) plan fee practices.  (Click here for more information about those lawsuits.)  Following a month-long trial in 2009, and then three years of deliberation and post-trial wrangling, the court concluded that the plan’s sponsor, fiduciaries, and service provider (Fidelity) had breached numerous fiduciary duties.  The result was a damages award of nearly $37 million.

Although the court’s decision in this case has already been appealed, and may well be reversed, it provides a number of “teachable moments” for ERISA fiduciaries.  For instance, the ABB plan’s fiduciaries contributed greatly to their own liability by adopting an unusually rigid investment policy statement (“IPS”).  Among other things, the IPS provided that “at all times . . . [revenue sharing] rebates will be used to offset or reduce the cost of providing administrative services to plan participants.”  Unfortunately for the ABB fiduciaries, however, they did not use revenue sharing to offset the cost of administration.  Indeed, they could not have done so, because they failed even to calculate the dollar amount of the recordkeeping fees that Fidelity charged, and thus could not know whether the money Fidelity received from investment funds as revenue sharing exceeded those fees.  The court concluded that by failing to follow the terms of their own IPS, the ABB plan’s fiduciaries breached their duty to administer the plan according to its terms. 

In addition, the IPS outlined a strict protocol that the plan’s investment committee was to follow when deciding whether to replace an investment fund.  This process required the fiduciaries to examine the fund’s performance over a three- to five-year period, place any underperforming fund on a watch list, and remove the fund after six months if its performance did not improve.  The court found that the ABB plan’s fiduciaries did not follow these protocols when they replaced the Vanguard Wellington Fund with the Fidelity Freedom Funds.  Instead, the fiduciaries relied solely on the recommendation of one member of the investment committee, who had failed to present any evidence to support his recommendation.  As it happened, the Wellington Fund did exceptionally well after it was replaced, while the Freedom Funds underperformed.  Because the fiduciaries did not follow the protocol set forth in the IPS for a fund’s replacement, the court found them personally liable for the lost earnings opportunity.

A clear lesson here is that a plan’s investment policy statement should be drafted carefully, so that it can be used as a defensive device to help fiduciaries avoid liability, rather than as an offensive weapon that creates liability.  Had the IPS in the Tussey case not been so rigid, the court might still have ruled against the fiduciaries.  But by ignoring their own policies and procedures, the ABB plan’s fiduciaries made it easy for the court to find fault.