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Understand employer duties regarding retirement plan expenses

May 11, 2012

Article courtesy of SBAM Approved Partner AdvanceHR

A recent U.S. District Court ruling offers a timely reminder of the importance of maintaining proper procedures when administering qualified retirement plans. The consequences of acting inconsistently with stated policy, perhaps even with good intentions, can be costly indeed.

Much attention has been focused in recent years on investment management and recordkeeping fees paid by retirement plan participants — that is, employees and retirees.  Specifically the focus has been on the level and the clarity, or lack of clarity, of those fees.

After some delays, these concerns led to new regulations from Department of Labor (DOL) that require plan service providers to furnish certain information by July 2012. This information, said  the DOL, will “enable pension plan fiduciaries to determine both the reasonableness of compensation paid to the service providers and any conflicts of interest that may impact a service provider’s performance under a service contract or arrangement.”

Some vendors have already been meeting the new requirements.  A related set of DOL regulations, which govern plan information provided by vendors to plan participants, will kick in by the end of August for most plans.

What Not to Do

How can employers get into trouble with respect to retirement plan costs — with or without the benefit of the new fee disclosure regulations? The recently decided case of Tussey vs. ABB Inc.  (U.S. District Court for Western District of Missouri), offers a good illustration of what not to do.

Trustees of a retirement plan of ABB Inc., a manufacturing firm,  were found to have breached their fiduciary duty to protect the interests of plan participants. Among other things, the trustees failed to monitor the fees it was paying to its primary 401(k) vendor (Fidelity Management Trust Co.) The case was brought as a class-action suit on behalf of plan participants.

At the heart of the case is the plan trustees’ failure to adhere to their own investment policy statement (IPS), which is the essential blueprint dictating how investment and related decisions are to be carried out.  The term “IPS”  cropped up more than 50 times in Judge Nanette K. Laughrey’s 81-page ruling, indicating the critical importance of the document.

Eye on Fee Structure

In one fateful decision, the trustees accepted a change to the formula used to determine recordkeeping fees. Specifically, the plan switched  from simply paying a flat per-participant charge, to a system in which fees came out of asset management fees, and rose as plan assets grew. The result of the arrangement was recordkeeping charges rose by about 200 percent over time as plan assets rose, yet actual recordkeeping services provided did not grow with plan assets. In other words, the recordkeeper appears to have enjoyed a windfall at plan participants’ expense.

Also, plan trustees never bothered, initially, to benchmark their plan costs — further evidence of a lack of the prudent behavior required of plan trustees. They later hired a consultant to analyze their cost structure. The analysis indicated ABB’s plan was paying abnormally high fees — yet trustees failed to do anything about it.

Disregarding the Investment Policy Statement

Another failure to pay heed to the plan’s IPS occurred when trustees dropped one investment manager and switched to a new one. The change was made without satisfying the IPS’ detailed processes for evaluating the performance of the fund being dropped, and also without giving full consideration to more than one alternative fund manager.

Trustees also committed a fiduciary breach, the court concluded, when  they agreed to use a class of mutual fund shares with a relatively higher expense ratio, contradicting an IPS mandate to use a share class with the lowest expenses.

The court found ABB liable for $13.4 million in excess fees paid by the plan, and nearly $22 million for the inferior investment returns participants earned due to the trustees’ decision to switch investment funds on their behalf.

As the DOL states on a web page dedicated to explaining fiduciary responsibility for benefit plans, “fiduciaries who do not follow these principles of conduct may be personally liable to restore any losses to the plan, or to restore any profits made through improper use of plan assets. Courts may take whatever action is appropriate against fiduciaries who breach their duties under ERISA, including their removal.”

While other federal trial courts are not technically bound by the principles established in this ruling, it’s a safe bet they would look to Tussey vs. ABB Inc. for guidance. Employers should do the same.

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