After a four-week bench trial, the court in Tussey et al. v. ABB, Inc. et al., No. 2:06-CV-04305 (W.D. Mo. Mar. 31, 2012) (pdf) held that the fiduciaries of two 401(k) retirement plans breached their fiduciary duties to plan participants and were liable for $35 million in damages.  Although challenges by 401(k) plan participants to the amount or disclosure of administrative fees charged by service providers to their plans have largely been unsuccessful, the Tussey case illustrates the importance of fiduciary prudence in the manner in which administrative fees are established and monitored.

To some, the decision from the Tussey bench trial was surprising due to the court's earlier decision in 2008 (pdf) holding that the failure of the fiduciaries to disclose revenue sharing payments to the plan participants was not a breach of fiduciary duties because ERISA and Department of Labor (DOL) regulations did not require the disclosure.  Irrespective of its prior decision, at the conclusion of the trial, the court ruled that the fiduciaries breached their duties when they: 

(a) failed to monitor recordkeeping costs;

(b) failed to negotiate rebates for the plan;

(c) selected more expensive share classes, rather than less expensive ones for the plan’s investment platform;

(d) failed to properly deliberate over the removal of a fund; and

(e) permitted rates in excess of market rates allegedly to subsidize the services provided to other ERISA plans and to the corporation.

The court made a number of factual findings that underpinned its ruling, including that the fiduciaries: (1) did not know or inquire into the amount of revenue sharing fees the plans’ service provider was receiving from year to year and, thus, did not properly monitor these fees, assess their reasonableness, or comply with the court’s interpretation of the plans’ Investment Policy Statement; (2) failed to take action in response to a third party consultant’s opinion that the revenue sharing fees exceeded market rates; (3) allowed the excess fees to subsidize other services provided by the service provider to the company’s non-qualified plans, health and welfare plans, and payroll operations; and (4) failed to engage in a deliberative process before replacing an existing fund with a lifestyle or target-date fund, in part because of a desire to reduce company fees overall, rather than fees related to the 401(k) plans.     

Lessons Learned …

As the 2008 and 2012 Tussey decisions illustrate, fiduciary duties relating to administrative fees are not limited to disclosure obligations.  Plan administrators who fail to learn what they can about the services provided to their plans do so at their peril.  Taking a minimalist approach to plan administration or fiduciary decision-making can become an expensive proposition, particularly when the case law can evolve and require more of fiduciaries.

Once the new DOL fee disclosures regulations are in effect, it is also possible that a new wave of 401(k) fee litigation will arrive by participants who claim first-time knowledge of alleged fiduciary breaches.  It is important, therefore, for fiduciaries to make sure that their decisions regarding service providers, fee arrangements, and investment options are properly and thoroughly documented.  Fiduciaries should employ a deliberative process that is keen to even a mere allegation of a conflict of interest.

Governing plan documents also should be reviewed to ensure that they are in line with the fiduciaries’ operation of the plan and are not open to interpretations by courts or opposing counsel in ways that impose duties beyond those intended.