Schlichter Bogard & Denton Obtains $36.9 Million Verdict for Employees and Retirees Against Fidelity and ABB
March 31, 2012. After a four-week trial in the Western District of Missouri, which was the first full trial in the United States of a 401(k) excessive fee case, Federal District Court Judge Nanette K. Laughrey found that ABB and Fidelity engaged in prohibited transactions and breached their fiduciary duties to salaried and union ABB 401(k) plan participants by, among other things, allowing excessive administrative fees, violating governing plan documents, and improperly benefiting from "float" interest earned from participant's investments. For these breaches and violations, the Court ordered ABB to pay damages in the amount of $35.2 million and ordered Fidelity to pay damages in the amount of $1.7 million. In addition, the Court ordered significant injunctive relief including requiring ABB to monitor the ABB 401(k) plan fees in accordance with their duties of prudence, loyalty, and in accord with ABB 401(k) plan documents. Further, and within 18 months of the Court's Order, ABB is required to solicit bids from prospective administrative service providers for the 401(k) Plan. To eliminate future breaches, ABB is prohibited from using the same service provider to provide services to both the 401(k) Plan and ABB's corporate services and Fidelity is prohibited from using float interest for its own benefit without the express agreement of the ABB 401(k) plan.
ABB 401(k) Plan Paid Excessive Recordkeeping Fees
In finding that the ABB 401(k) plan paid excessive recordkeeping fees, the Court determined that ABB breached its duties of prudence by failing to properly monitor those fees, allowing uncapped and unchecked revenue sharing, failing to calculate all sources of fees paid by the 401(k) plan, and failing to follow the 401(k) plan's adopted Investment Policy Statement intended to properly govern the administration of the 401(k) plan. In sum, the Court stated the following:
[A]s fiduciaries, the ABB Defendants are required to act prudently in discharging their duties. ERISA § 404(a)(1)(B). [ ] Here, the process by which ABB determined to use revenue sharing as the Plan?s payment model was imprudent. First, ABB did not select revenue sharing to achieve progressivity. Second, because it failed to calculate how many dollars would be or had been generated by revenue sharing for Fidelity Trust, ABB could not analyze how revenue sharing would benefit the Plan; nor was it in a position to negotiate revenue sharing (alliance rebates) with Fidelity Trust by leveraging the Plan?s size to offset or reduce recordkeeping costs. As the IPS is a governing Plan document within the meaning of ERISA section 404(a)(1)(D), ABB breached its fiduciary duties when it failed to comply with this provision of the IPS
As a result of these breaches committed by ABB, the District Court found that the Plan suffered losses of $13.4 million.
ABB Breached Its Fiduciary Duties and Served Its Own Self-Interests in the Selection and Removal of 401(k) Plan Investment Options
The District Court also found that ABB violated its fiduciary duties and committed prohibited transactions by improperly removing the Vanguard Wellington Fund and replacing it with the Fidelity Freedom Funds. In particular, the Court found that ABB was primarily motivated in removing the Wellington Fund in order to reduce its own out-of-pocket costs and creating more ?opaque? fees that were hidden to ABB 401(k) participants. In serving its own interests, the Court found that ABB, Inc., including one of its officers Jack Cutler, blatantly ignored the Investment Policy Statement ("IPS") that required a deliberative process meant to serve the exclusive benefit of the 401(k) Plan. Specifically, the Court stated the following:
Mr. Cutler's recommendation that the Wellington Fund be removed for poor performance was a blatant violation of the IPS and illustrates a careless, imprudent decision-making process.
As a result of these breaches committed by ABB, the District Court found that the Plan suffered losses of $21.8 million.
ABB Breached Its Fiduciary Duties By Allowing the ABB 401(k) Plan's Excessive Fees to Pay for ABB's Corporate Administrative Services
Despite ABB being told by an independent third party that the excessive fees paid by the ABB 401(k) plan to Fidelity were being used to subsidize ABB's corporate services provided by Fidelity, ABB purposefully did nothing to investigate this "cross subsidization." ABB's failure to take action to correct the improper cross subsidization was described by the Court as follows:
The Court specifically finds that Mr. Scarpa [an officer of ABB, Inc.] failed to make a good faith effort to prevent the subsidization of administration costs of ABB corporate services due to the revenue sharing generated by PRISM Plan assets. He consistently communicated with Ms. Morlan [of Fidelity] throughout the negotiations, yet raised no concern directly with her or any other Fidelity Trust representative. His failure to contact anyone at Fidelity Trust is indicative of the purposeful blind eye he turned to the subsidization of ABB corporate services with PRISM funds so that ABB, Inc., could continue to receive discounted services for itself.
Fidelity Breached Its Fiduciary Duties to the ABB 401(k) Plan By Improperly Using Float
The District Court further found that Fidelity breached its fiduciary duties to the ABB 401(k) plan by improperly using "float" interest earned on participant's contributions and distributions for its own benefit. "Float" refers to the interest earned when contributions are temporarily held in short-term investments before those contributions are invested in the selected investment options. In finding that Fidelity served its own interests over those of the ABB 401(k) plan, the Court held that Fidelity used float to pay its own bank expenses and did not properly credit the float to the ABB 401(k) plans.
As a result of these breaches committed by Fidelity, the District Court found that the Plan suffered losses of $1.7 million.
As a Result of the Fiduciary Breaches, the District Court Ordered Future Relief for the Employees and Retirees in the ABB 401(k) Plan
To correct ABB and Fidelity's breaches against the ABB 401(k) plan, the District Court ordered substantial future injunctive relief. In particular, the Court ordered ABB to implement and utilize a "competitive bidding process, including a request for proposal, to select a new recordkeeper." The Court further ordered ABB to "monitor recordkeeping costs in accordance with their duty of prudence, loyalty, and in accord with Plan documents." In order to eliminate further cross-subsidization, the Court ordered that so long as it serves as fiduciary to the Plan, ABB shall not use the ABB 401(k) plan recordkeeper to also provide corporate services to ABB. Further, the Court ordered Fidelity not to transfer float income to any entity other than the ABB 401(k) plan unless expressly permitted to do so by the terms of its agreement with the ABB 401(k) plan.
*Regarding these findings of prohibited transactions, breaches of fiduciary duties, and award of damages against ABB and Fidelity, Jerome J. Schlichter, partner of Schlichter Board and Denton and lead trial counsel for ABB 401(k) plan participants, states "Plan sponsors and fiduciaries cannot serve their own interests with the employees' retirement assets. This is what the Court determined ABB and Fidelity did. Instead of getting lower fees for ABB employees in their 401(k) Plan, ABB and Fidelity used employees' retirement assets to benefit themselves."
For more information, please contact Schlichter Bogard and Denton at (314) 621-6115.
In re: Tussey et. al. v. ABB, Inc. et al., Case No. 2:06-CV-0435 (W.D.Mo.)