The importance of understanding and upholding fiduciary duties is more critical than ever as recently demonstrated by the Tussey v. ABB, Inc. verdict. A judgment against ABB and its record keeper, administrator and (through its affiliate) investment manager Fidelity awarded $37 million to participants in ABB's two 401(k) plans. Federal district court judge Nanette Laughrey found that the plan's fiduciaries failed to: observe increasing plan assets and renegotiate fees; calculate the fees paid to Fidelity, and listen to a hired third-party consultant when he pointed out the excessive plan fees.
ABB's fiduciaries breached their duties in several ways. The excessive fees helped to subsidize costs of other plans and services provided by Fidelity with the knowledge of at least one fiduciary. Although ABB had an Investment Policy Statement, which dictated procedures for choosing investments, the fiduciaries did not follow the policy. Furthermore, the fiduciaries selected pricier share classes over better performing, less expensive ones in order to subsidize the company's costs. So much for the fiduciary duties of loyalty and prudence.
What can Tussey v. ABB teach plan fiduciaries? Fiduciaries must always act in the best interests of the plan's participants, no matter what. This can sometimes be difficult to do, especially because people are self-interested by nature. As advisors, it's our responsibility to ensure that our clients make the best possible decisions and to protect themselves as fiduciaries to their plans. In each decision they make, fiduciaries should ask themselves, "What would a participant do?" This will not only help participants, but it will also help fiduciaries reduce their liabilities. If fiduciaries learn to think like participants, they may change they way they view "self-interest."
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Here are some questions that your fiduciaries can ask themselves to avoid the mistakes made in Tussey.
- Why is my rate going up? As plan assets increase, it is possible for plans to negotiate lower rates for its participants. ABB had more than $1 billion invested with Fidelity, but didn't know (or didn't care) that the fees for its participants kept rising even though the services provided remained the same.
- What does the Investment Policy Statement (IPS) say? IPSs are created for a reason and need to be followed to ensure fiduciary protection. Before making any investment decision, fiduciaries should consult their company's IPS to make sure they are properly following investment and administrative procedures. ABB's fiduciaries engaged in revenue sharing to help reduce costs, which was against their IPS.
- Is this the lowest cost share class available? From similarly performing share classes, fiduciaries must select the ones with the lowest cost to participants, even at the company's expense.
- Are there better-performing, less expensive investment funds out there? ABB went to Fidelity for nearly all of their investment needs, and its fiduciaries didn't seem to bother researching options that were better for its participants. When making an investment lineup, fiduciaries should always be on the lookout for the best funds available for their participants.
The success of a plan ultimately comes down to the ability of its participants to achieve paychecks for life – financial freedom and security upon retirement. It's our duty as financial advisors (and the duty of plan sponsors and fiduciaries) to help participants accomplish this goal. Counsel your fiduciaries so they aren't sued and owe millions of dollars to participants.
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