As a Plan Fiduciary, you cannot rely on a non-fiduciary service provider with a conflict in interest to accept responsibility for their recommendations.
In a recent court decision (Tussey vs. ABB, Inc., U.S. District Court, Western District of Missouri Central Division), a Company sponsoring a retirement plan (ABB, Inc.) along with the head of the Benefits committee, named individually, and the entire committee, were ordered to pay a judgment of $35.2 million.
The ruling of the court states that the above parties "...violated their fiduciary duties to the Plan and its participants when they failed to monitor recordkeeping costs and negotiate for rebates from Fidelity Trust..." They also violated their fiduciary duties when the Plan paid Fidelity "...an amount that exceeded market costs for Plan services in order to subsidize ABB's corporate services."
I wonder if other companies have received free or discounted services based on profitability of handling retirement plan assets. Has a payroll company ever discounted payroll services when the employer hands over the retirement plan? Do some banks provide better loan terms when the retirement plan is involved? How about the practice of an investment or insurance broker providing plan decision makers with expensive trips, or luxury box tickets to the Red Sox or Yankees games? Obviously, some of these practices may not result in a $35 million judgment, but the moral of the story is that under ERISA, you cannot use OPM (other people's money) for personal gain.
There were a number of issues related to prudent plan management that were addressed in the ruling. Here is a list of items that were identified in the court's decision that both Plan Sponsors and Retirement plan advisors should know and understand.
- Asset based fees for administration may not be prudent as fees can grow even if no additional services are provided.
- It is important, not just to monitor gross fund expense ratios, but also to monitor the dollar amount used for administration and recordkeeping that is paid by revenue sharing and request rebates to the participants if excessive.
- Varying amounts of revenue sharing depending on fund selection could be problematic, especially if those with higher balances choose low revenue producing investments, thus paying little or no costs (i.e. index funds- see the revenue disparity explanation in a previous post), while others subsidize the expense.
- Failure to follow the Investment Policy Statement (IPS) which stated that revenue sharing would be used to reduce the cost of investing by participants.
While there were many other issues raised, the most costly ($21.8 of the total $35.2 million) was the decision to map the Vanguard Wellington Fund with an expense ratio of 0.27% (Investor class VWELX) to the Fidelity Freedom Funds with an expense ratio of 0.75% (Fidelity Freedom 2030 FFFEX) which according to the findings of the court, was done so to save the company (ABB, Inc.) administrative costs and to shift these costs to the participant in the form of higher expense ratios and thus higher revenue sharing to pay for expenses.
Of particular note in the findings, Fidelity Trust was deemed not to be a Plan Fiduciary when suggesting that the higher cost Fidelity Funds should be used. Since they were not a fiduciary, the proposal "represented Fidelity Trust's own interests...". "These interests were to increase Fidelity Trust's compensation for the recordkeeping and administrative services to the Plan." Hence, it was the employer's responsibility to make the determination as to whether the replacement of the Vanguard Wellington fund with Fidelity Freedom funds was prudent. The court found no evidence that this decision was in the best interest of the participants.
Making decisions regarding the investments and operation of an ERISA retirement plan can be far more complicated than many employers and committee members may realize. It is critical that the decision makers either have the requisite skills and knowledge to review and understand all of the ramifications or hire a professional who can so advise. Relying on any party with an obvious "conflict of interest" no matter how large or reputable, can be a costly mistake. The ABB, Inc. retirement plans had $1.4 billion in assets as of December 31, 2010. To put the monetary amount in perspective, the $35.2 judgement represents 2.4% of the total assets. This would equate to a sanction of $487,000 on a plan worth $20 million. Would this be an acceptable level of risk for most small businesses?