Legal Alerts

Plan Sponsor Liable for $35 Million in 401(k) Fee Case


In the first case of its kind to be tried and decided on the merits, plan sponsor ABB, Inc. has been hit with a $35.2 million judgment for breach of fiduciary duty with respect to 401(k) retirement plan fees. 

Deciding in favor of the plaintiff class of plan participants, the Missouri federal district court ruled on March 31that ABB’s breach of fiduciary duty was threefold:

  1. It failed to monitor the recordkeeping fees and revenue-sharing payments made to the plan’s trustee;
  2. It failed to negotiate rebates to offset or reduce the cost of providing administrative services to plan participants; and
  3. It replaced an actively balanced mutual fund with the trustee’s target date fund that generated more in revenue sharing for the trustee.

Revenue-sharing is a common way to pay for plan administrative fees, often presented by vendors to plan sponsors as a painless way to cover plan expenses with no direct payment from the plan sponsor or participants. According to the Court, if a plan sponsor decides to go this route “it also must have gone through a deliberative process for determining why such a choice is in the Plan’s and participants’ best interest.” 

ABB’s biggest mistake may have been adopting an investment policy statement containing language that revenue-sharing “be used to offset or reduce the cost of providing administrative services to plan participants.” ABB never determined the dollar amount of the recordkeeping fees, so ABB could not know whether revenue-sharing was offsetting or reducing the cost. As it turns out, the Court determined the plan overpaid for the recordkeeping services, because the revenue-sharing generated by the plan’s assets far exceeded the market value for recordkeeping and other administrative services provided by the trustee. 

The case is a stark reminder that plan fiduciaries must understand the fees, including revenue sharing, being paid by and through plans. This is particularly timely as the July 1, 2012 effective date for Department of Labor regulations on fee disclosures to plan sponsors is quickly approaching. As plan sponsors begin to receive such disclosures this summer, Lindquist & Vennum's Employee Benefits and Executive Compensation Group can help you understand what and how fees are being paid.

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