The American division of ABB Inc. and asset management giant Fidelity Investments have been ordered by a federal judge to pay nearly $37 million for making 401(k) plan participants pay excessive plan fees.
Nanette Laughrey, U.S. District Court judge for the Western District of Missouri Central Division in Jefferson City, ruled in Tussey v. ABB that there were four key problems with the arrangement between ABB and two of Fidelity's divisions.
First, the Cary, North Carolina-based technology manufacturer broke federal law because it didn't make sure administrative costs were reasonable for its two 401(k) plans, and it didn't negotiate for rebates from its record keeper, Boston-based Fidelity. Next, ABB agreed to pay Fidelity more than the market rate for plan services.
"ABB and the employee benefits committee violated their fiduciary duties to the plan when they agreed to pay to Fidelity an amount that exceeded market costs for plan services in order to subsidize ABB's corporate services," Laughrey wrote.
Laughrey's 81-page ruling, which was handed down March 31, also said Fidelity broke its fiduciary obligations when it misdirected interest—called "float income"—on contributions before being moved into selected investment accounts. Laughrey said Fidelity ignored its responsibilities when it transferred float income specifically to the investment options instead of to the overall benefit of the plan.
ABB has been ordered to pay $35.2 million, while two Fidelity businesses, which had nearly all of the charges against them dropped, are liable for $1.7 million. ABB did not return calls or requests for information.
An ABB spokesman says the company is considering its options. "We respectfully disagree with the judge,and it is likely we will appeal," the spokesman said.
A Fidelity spokeswoman also says the company is evaluating the court's opinion.
The case is significant because new federal rules that go into effect this summer will require 401(k) plan service providers—such as record keepers and investment managers—to report detailed fee information to plan sponsors. Once plan sponsors get that information, they will be required to give it to their participants.
Financial author and radio host Bryan Binkholder says he expects similar lawsuits once the new rules show plan sponsors and their participants how much they are paying for retirement plans.
"It is amazing—the number of plan sponsors who come up to me that truly have no clue how much they are paying" for services, Binkholder says. "They are busy running their company and don't have the time or the expertise. The industry has a crafty way of hiding fees."
The case is an outlier and will eventually get reversed, says Christopher Rillo, a partner at the law firm Schiff Hardin in San Francisco. Rillo says the verdict doesn't reflect past decisions involving fees. He adds that federal law allows leeway in making choices, and plan sponsors should document their decision-making process.
Rillo says that in this case, the judge based her reasoning on the future results, not what ABB and Fidelity did at the time.
"Heightened awareness is definitely a good thing, but it's unfair to say in hindsight that there are cheaper options," Rillo says.
To read the decision, click here.
Patty Kujawa is a freelance writer based in Milwaukee. To comment, email firstname.lastname@example.org.