$35 million in personal fiduciary liability due to ignorance

In a recent appellate court decision, Tussey vs. ABB Inc., the members of a retirement committee for a large employer were found personally at fault for their failure to have a deep understanding of the marketplace for administrative services. These were not professional managers but served on the retirement committee as part of their daily job responsibilities. In many respects, the committee members were careful and thoughtful. Their practices for managing the two 401(k) plans under their care was typical. The startling $35 million judgment was due to the following:

Revenue Sharing: The committee members didn't understand how much revenue sharing was retained by the third-party administrator (a large, well-respected TPA) for mutual funds offered under the plan. The committee didn't even know how much the plan was paying for services or that it was paying substantially above the market for TPA services.

Investment Policy Statement: The committee had a detailed investment policy statement and didn't follow it. In the end, the committee would have fared much better without an investment policy statement. Much of the liability was due to a simple failure to follow the statement.

Investment Advisor: The committee did not rely on an independent investment advisor. Instead, it relied on the performance information and recommendations from its TPA. The committee did not appreciate that the TPA was representing its own business interests and promoting its own products.

The two plans were managed through a typical bundled services arrangement that offered administrative services, investment funds and trust services. Fees were assessed through revenue sharing, including 12b-1 fees.

The most serious issue to the court was the failure to follow several policies in the investment policy statement or "IPS." The IPS adopted by the committee required the selection of funds with lower expense ratios. Although the court ruled that ERISA does not require a fiduciary to do this, the committee was liable for simply failing to follow this discretionary feature they had adopted in their own IPS. There were other examples that indicated the committee members didn't seem to know what policies were included in their IPS. The committee never used the substantial size of the plans as leverage to negotiate a better deal for participants.

What A Fiduciary Should Do Now

This case illustrates that there is no simple, turn-key approach to sloughing off ERISA liability. Going forward, fiduciaries should:

  • Review and revise the investment policy statement to eliminate detailed procedures and hard-wired triggers. It is preferable to adopt a policy that requires the committee to act with general fiduciary prudence.
  • Learn how revenue sharing and fees paid by the plan are used to pay for services and how much is being received in return.
  • Carefully select an independent investment advisor who specializes in the retirement plan market. Extensive training and time is needed to stay abreast of a complex and evolving market. Do not solely rely on the information given by the fund managers and the TPA.
  • Periodically benchmark expenses. This does not require a full scale RFP. Fiduciaries should know how their plan compares to the marketplace.
  • Make sure you have specific ERISA indemnification from your employer through an indemnity agreement or board action. This may take some effort and legal assistance. Most plan committee members do not have this protection from lawsuits and are unaware. ERISA fiduciary insurance may also be desirable.

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