conflicts-of-interestDOL regulationseconomic justiceHow 401(k) fees destroy wealthMutual Funds

Revenue sharing lawsuit costs plan sponsor $35 million

In what is being called the first suit involving revenue sharing and fee disclosure and heightened transparency, a Missouri company has been ordered to pay $35 million to current and former plan participants.

The lawsuit  (Ronald Tussey et al v. ABB Inc. et al, Case No. 2:06-CV-04305-NKL, United States District Court, W.D. Missouri, Central Division, March 31, 2012.)  was settled in favor of the plaintiff as the court found that ABB, a Missouri company, and other plan providers, violated their fiduciary duties to the defined contribution 401(k) plan and its participants when they failed to monitor recordkeeping costs and negotiate for rebates from Fidelity Trust. Fidelity served as the plan’s recordkeeper. The Missouri federal district court ruled on March 31, 2012, that ABB will have to pay $35.2 million as part of the settlement to current and former plan participants.

Other defendants in the case were the employer, the named fiduciary; the company’s employee benefits committee; Fidelity Trust, which served as recordkeeper; and Fidelity Research, Fidelity’s investment adviser to the Fidelity mutual funds offered by the plan. Most of the revenue sharing abuses occurred in Fidelity Trust’s PRISM Plan.

The trial, which lasted one month, centered on how fees were paid to Fidelity. This included monitoring how the plan sponsor chose to provide payment to Fidelity and their failure to closely monitor recordkeeping fees. While the court found that revenue sharing was permissible, the fiduciary (plan sponsor) “must have gone through a deliberative process for determining why such a choice is in the Plan’s and participant’s best interest.”

The court also found that ABB did not monitor whether the revenue sharing was reasonable, or if the expense ratio justified the amount of revenue sharing, or what comparable funds charged in terms of their dollar size. As a result, ABB violated its own investment policy statement concerning revenue sharing, which was an ERISA violation.

Blatant Examples of Conflicts-of-Interest

In one of the more blatant examples of conflicts-of-interest in the 401(k) business, and certainly not the last, the court found that ABB was transferring assets invested in an actively-balanced mutual fund to a target-date fund simply because the latter paid more in revenue sharing, not because it offered better performance. ABB also only offered share classes, which paid more in revenue sharing loads in order to maintain the revenue sharing stream to Fidelity’s trust company.

In essence, ABB was victimizing its own plan participants by making them pay more in revenue sharing to offset plan expenses, without any choice of alternatives or receiving greater services.

Dividing the treasure via revenue sharing

Dividing the treasure via revenue sharing

Court documents found that Fidelity Trust was paid primarily with revenue sharing. An industry publication, “Another worst-case scenario for fee disclosure,” (Benefits Pro, Jenny Ivy, April 12, 2012,) called revenue sharing “a little known practice by which 401(k) providers share what they earn with recordkeepers, broker/dealers and TPAs.” In the 401(k) industry, revenue sharing is often considered “administrative” payments. Prior to the new DOL regulations,  fee disclosure fee payments were commonly not fully disclosed to employers and plan participants.

This case should be the first of more to come.  One attorney said plan sponsors may settle the cases rather than litigate to save money and embarrassment.  When 401(k) administrative and benefits committees fail to do their jobs and opt to settle, they are just using  shareholder money to pay for their own mistakes.  When they were paying excessive revenue sharing amounts, they were paying for their mistakes using participants money.

In either case,  when benefits committees and plan sponsors make big fiduciary mistakes, it looks like another example of “heads I win, tails you lose.” or in other words, shareholders or plan participants lose either way.

 

 

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Chuck Epstein

Chuck Epstein

Chuck Epstein has managed marketing communications and public relations departments for major global financial institutions and participated in the launch of industry-changing financial products. He also has written by-lined articles for over 50 publications, five books and served as editor and publisher of nation’s first newsletter on the topic of using the PC for personal investing and trading. (“Investing Online, 1994-1999). He also is a marketing consultant, writer and speaker on topics related to investor protection and opportunities in the very dynamic cannabis industry.

He has held senior-level marketing, PR and communications positions at the New York Futures Exchange, Chicago Mercantile Exchange, Lind-Waldock, Zacks Investment Research, Russell Investments and Principal Financial.

He has won national awards from the Mutual Fund Education Alliance (MFEA) and his web site, www.mutualfundreform.com, was named best small blog in 2009 by the Society of American Business Editors and Writers (SABEW).

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