Federal regulators, with the encouragement of Congress, have implemented several new rules in the past two years – most notably retirement plan fee disclosure regulations – to spur employers to monitor more closely the fees charged by mutual fund companies and other vendors who deal with investments offered under employer-sponsored retirement plans. Such fees have sometimes not been reported to employers but merely reflected in the net returns on investment and can, over time, impose a significant cost on employees’ retirement funds.
Recent Litigation
Most employers are aware of the recent rulemaking. You may not be aware, however, that plaintiffs’ attorneys also have forced employers to focus on the issue through class action suits alleging that employers breached their ERISA fiduciary duty to ensure that retirement plan fees are reasonable. The liability threat to employers was underscored by a recent federal court decision, Tussey v. ABB, Inc., awarding retirement plan participants more than $36 million in damages due to the failure of the employer, ABB, Inc., to monitor and manage responsibly the fees paid to the third party administrator (“TPA”) of its two 401(k) plans.
In its decision, which was issued on March 31, 2012, the Missouri federal district court ruled that the employer, whose 401(k) plan assets totaled approximately $1.4 billion, violated its ERISA fiduciary duties by: (1) failing to calculate and determine the reasonableness of the amount paid to its TPA, Fidelity Management Trust Company; (2) failing to negotiate rebates from its TPA to reduce plan expenses, as required under the plan’s Investment Policy Statement; (3) selecting mutual fund share classes that were more expensive than others; (4) replacing a plan mutual fund with a more expensive fund offered by an affiliate of its plan TPA; and (5) agreeing to pay the plan TPA above market rates for 401(k) plan services in order to subsidize other non-plan related services provided to the company by the TPA, such as a company payroll service.
The case is one of several that one St. Louis law firm has filed against large employers. Just this month, that firm negotiated a $9.5 million settlement of a similar lawsuit against Kraft Foods, Inc.
Steven B. Long is guest author for the Summer 2012 issue. Mr. Long is a Partner in Parker Poe’s Employee Benefits & Executive Compensation group, where he advises businesses and individuals regarding tax and employee benefits issues. He has extensive experience working with employers in banking, retail, technology and other industries to establish, maintain and correct defects in the operation of tax-qualified retirement plans, executive compensation agreements, stock incentive plans and other employee benefits.
Additional Articles from the Summer 2012 Public Company Forum:
Main
Doug's Note: A Moment of Sanity?
Shedding Light on Blackout Periods
My Name is Bond, James Bond (...Actually, it's Jim Bonde and I work down in Accounting...): Lessons from a Resume Scandal
Dodd-Frank Act Progress Report: Summer 2012 (with a JOBS Act Update for Good Measure)