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$35.2M Penalty A Lesson Learned

A Fiduciarys Role Bundling vs. Unbundling

By: Michael E. Nolan President & CEO Nolan Financial Andrew Gibson, CPA Regional Managing Partner- Tax Services BDO USA LLP

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In the case, Tussey v. ABB, the defendants learned that the role of the Fiduciary is not one to be taken lightly and certainly not one for an individual who is unprepared for the consequences of their actions. This particular case strikes at the heart of many executives who have pension / 401(k) or related fiduciary responsibilities. There has been a recent movement in the last decade for companies to reduce their administrative fee burden. Companies have found that bundling their administrative fees with one provider can significantly reduce this hard dollar expense. However, bundling various qualified and nonqualified plan services can have unexpected issues with severe financial repercussions. In this paper, we will look at the facts of the case and suggest preventative measures that employers may consider so as to not find themselves in a similar situation. On March 31, 2012, a court in the Western District of Missouri finally issued its decision in Tussey v. ABB Inc., District Court, WD Missouri 2012- Case No. 2:06-CV-04035-NKL. The court determined that the plans fiduciaries were jointly and severally liable for $35.2 Million. This is one of a series of cases filed in 2006 by the Schlichter law firm alleging that ERISA covered 401(k) plans were paying their vendors excessive compensation. This case highlights the Fiduciary responsibility of the plan sponsor and the importance of separating fees by each plan, even if one vendor handles all the plans. In the case Tussey v. ABB, the Fiduciary failed to act in the interest of the plan participants and their beneficiaries, violating one of the main responsibilities of the Fiduciary. In addition, the Fiduciary should have
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acted in accordance with the ERISA Prudent Man Rule and defrayed the on-going expenses of the plans to a practicable extent. Lastly, the Fiduciary failed to follow the terms of the plan as established by the plan document. Tussey v. ABB reinforces why bundling qualified and nonqualified plan services may not always be in the best interest of an organization. Whenever an organization is faced with this decision, employers should closely examine their options. Overview Employees and retirees of ABB Inc. (ABB) filed a class action lawsuit against their employer. The lawsuit included ABB and their retirement plan recordkeeper, who was also the investment advisory group. The lawsuit charged ABB and its plan recordkeeper with breach of fiduciary duties under ERISA regulations by way of the fees paid for 401(k) plan services. After trying this case, and having reviewed voluminous records and testimony, the Court found that the ABB Defendants and its plan recordkeeper breached some fiduciary duties that they owed to the Plans. Specifically, the Court found: (1) ABB Defendants violated their fiduciary duties by: a. failing to monitor recordkeeping costs b. failing to negotiate rebates for the Plan from either this investment group or other investment companies chosen to be on the PRISM platform c. selecting more expensive share classes for the PRISM Plan's investment platform when less expensive share classes were available d. removing the Vanguard Wellington Fund and replacing it with this groups preferred fund (2) ABB, Inc., and the Employee Benefits Committee violated their fiduciary duties to the Plan when they agreed to pay to this group an amount that exceeded market costs for Plan services in order to subsidize the corporate services provided to ABB by this group, such as ABB's payroll and recordkeeping for ABB's health and welfare plan and its defined benefit plan

(3) The Trust division of this same group breached its fiduciary duties to the Plan when it failed to distribute float income solely for the interest of the Plan (4) The Research division of this group violated its fiduciary duties when it transferred float income to the Plan's investment options instead of the Plan. As to each of these breaches, the Court found that the Plan must be compensated for its losses and any ill-gotten gains by Defendants when they used Plan assets for their own benefit. Background: ABB offered a variety of retirement and welfare benefits to its employees. This included: A Defined Benefit Plan Participants received a guaranteed pension upon retirement, the amount of which is dependent on their years of service and annual salaries Two Defined Contribution Plans (known as PRISM Plans) - under section 401(k) of the Internal Revenue Code

The Plaintiffs were participants of the PRISM Plan. As part of this plan, ABB offered a 50% match to Participant contributions, up to six percent of their annual salaries. Participants could direct their contributions to be invested in any of the investment options pre-selected by ABB and managed by the investment management group. Participants retirement benefits were dependent on the performance of the investments that they choose. This investment management group invested the bank account balances, which held Plan contributions in overnight securities. As noted previously, this company was also the recordkeeper for ABBs Retirement Plans. As the recordkeeper, the company was expected to provide educational information, bookkeeping, and other services to PRISM Plan participants. The Problem Shortly after becoming the recordkeeper for the PRISM Plans, this company began providing total benefit outsourcing services for ABB. The recordkeeper lost money on the corporate services that it provided to ABB, but made substantial profits as the PRISM Plan recordkeeper.

During its relationship with the PRISM Plans, this investment advisory group and its various divisions were paid two different ways for its services. Originally, it was selected by a competitive bid process and was paid by a per-participant, hard-dollar fee. Over time, payment evolved to "revenue sharing or what some have called "soft dollars. The revenue sharing came from some of the investment companies whose products were selected by ABB to be on the PRISM platform. Those investment companies gave this investment management group a certain percentage of the income they received from PRISM participants, who selected their company's investment option. This same group also derived revenue sharing from an internal allocation within its interrelated companies. For example, one of their mutual funds was placed on the PRISM platform by ABB. When PRISM participants invested in this fund, a set number of basis points (i.e., a percentage) were transferred internally from investment management group, which managed the Fund, to a second company within this same group. When revenue sharing was used to pay the investment management group, its fees grew as the assets of the Plan, even if no additional services were provided for the Plan. Likewise, if the Plan's assets in those investments declined, the amount paid for the services could decline. However, when there was a concern by the investment management group that revenue sharing would decline, the group asked for hard-dollars to make up the difference. In addition, pursuant to its recordkeeping contract, this same group had the right to amend its compensation agreement for Plan services. There is no doubt that Fiduciary duties were breached. Adequate attention should have been given to the fiduciary responsibilities and roles of the participating employer and their investment advisory group. It is as equally important, if not more so, to be diligent in how decisions are made regarding the ongoing administration of the qualified and nonqualified plans that many employers possess. This 81 page decision which was rendered on March 31, 2012 reinforces the significance of the role off the fiduciary and the significant impact that failure to abide by proper fiduciary guidelines can have on a company1.

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http://scholar.google.com/scholar_case?case=8904407233900766831&hl=en&as_sdt=2&as_vis=1&oi=scholarr

Solution Alternatives A best practice solution that the court did not offer is one that can have significant impact on a companys ability to mitigate any revenue sharing concerns. Often in the corporate world, it is believed that if one provider is able to do many different tasks, as was described in the Tussey v. ABB decision, it will lead to saving real dollars. At first glance this alternative seems to offer a great solution; however, every outside vendor that helps an organization accomplish its corporate goals and objectives is performing a paid service. Each vendor will possess specific strengths and weaknesses in its expertise. The best practice solution that we would recommend would be for the company to select those vendors whose expertise is specific to the need the organization is trying to accomplish. If an Employer is seeking a 401(k) provider, then its RFP should seek the best-in-class 401(k) provider available that fits the profile of their company. If the Employer is in need of a best-in- class pension /401(k) advisor, then the RFP should seek this specific discipline. If they are seeking a best-in-class nonqualified plan recordkeeper, then the RFP should seek this specific discipline. Why is this bifurcation or unbundled set of services so important? As shown in the Tussey v. ABB case, early intentions were for ABB to abide by its Investment Policy Statement, but later it morphed into a belief that using revenue sharing or soft dollars was a great way to get many other services at no additional hard dollar costs. The court had no particular issue with revenue sharing, but did take issue with ABBs decision to let the companys 401(k) and its participants pay for these additional services. In the following section, Andrew Gibson, Regional Managing Partner of Tax Service at BDO in Atlanta, Georgia provides an in-depth look at the facts of this case. Significance Of Being A Fiduciary As you can see from Tussey vs. ABB, fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. These responsibilities include: Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;
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Carrying out their duties prudently; Following the plan documents; Diversifying plan investments; and Paying only reasonable plan expenses.

The duty to act prudently is one of a fiduciarys central responsibilities under ERISA. It requires expertise in a variety of areas and as can been seen in Tussey vs. ABB, when a fiduciary lacks that expertise, the fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions. With these fiduciary responsibilities, there is also potential liability. Fiduciaries that do not follow the basic standards of conduct may be personally liable to restore any losses to the plan, or to restore any profits made through improper use of the plans assets resulting from their actions. A fiduciary should also document decisions and the basis for those decisions. For instance, in hiring any plan service provider, a fiduciary may want to survey a number of potential providers, asking for the same information and providing the same requirements. By doing so, a fiduciary can document the process and make a meaningful comparison and selection. A result of Tussey vs. ABB, fees paid by the plan and related employer plans (whether or not a qualified plan) are just one of several factors fiduciaries need to consider in deciding on service providers and plan investments. When the fees for services are paid out of plan assets, fiduciaries will want to understand the fees and expenses charged and the services provided. While the law does not specify a permissible level of fees, it does require that fees charged to a plan be "reasonable." After careful evaluation during the initial selection, the plan's fees and expenses should be monitored to determine whether they continue to be reasonable. Where a service provider offers a number of services for one fee, sometimes referred to as a bundled services arrangement, it is important, as Tussey vs. ABB illustrates, that a fiduciary compare all services to be provided with the total cost for each provider. A fiduciary should consider whether the estimate includes services you did not specify or want. Summary Many qualified plan providers have tried to expand their 401(k) administrative platform to accept nonqualified plan designs, which has been met with limited success.

Oftentimes, the plan sponsor /employer is persuaded to allow their 401(k) vendor to do this because the overall and specific costs to administer the employers nonqualified plan will be under the market average. While we are not privy to all the facts surrounding this case, it seems that this is exactly what happened in the Tussey v. ABB case. The 401(k) provider was overcharging for the plan sponsors 401(k) services and charging well under the market for other HR services including the administration of the plan sponsors nonqualified plans. For Plan Sponsors, there is a variety of solutions that would ease the administrative burden of their 401(k) and their nonqualified plans. In our recent Nolan Financial Report, we suggested using a single sign-on to ease the burden on the plan sponsor, the participant and the administrator. A single sign-on allows the company to engage the expertise on both the qualified and nonqualified side, while streamlining access to both plans. This also speaks directly to the central issues uncovered in Tussey v. ABB, which deals directly with the cost of each service provided. The role of the fiduciary, which was a major thrust in this court case and its subsequent decision, is specific to the administration of qualified plans. Contact Nolan Financial for more information or to answer any questions about Nonqualified Benefits. About Nolan Financial For more than twenty years, Nolan Financial has specialized in the custom design, enrollment, funding and administration of nonqualified retirement plans for the benefit of the senior executives of mid to large size public, private and tax exempt organizations. Nolan Financial is a national practice with offices in Maryland, California, Minnesota and an administrative center in Texas. Nolan Financial Group is not affiliated with Lincoln Financial Advisors Corp. For more information about Nolan Financial, visit http://www.nolanfinancial.com.
Lincoln Financial Advisors does not offer legal or tax advice. BDO USA,LLP is not affiliated with Lincoln Financial Advisors Corp or Nolan Financial Group. Registered associates of Nolan Financial are registered representatives of Lincoln Financial Advisors Corp. Securities offered through Lincoln Financial Advisors Corp., a broker/dealer. Member SIPC. Insurance offered through Lincoln affiliates and other fine companies. Lincoln Financial Advisors, 8219 Leesburg Pike #200, Vienna, VA 22182. CRN: 201212-2075287