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Wednesday June

  • 2012
  • 13

Fiduciary's Lament: Our retirement plan is free, how can I be paying too much?

by Martin Suechting in Total Rewards
Everybody likes to get a good deal, or at least think they are getting a good deal, right? It follows that if your retirement plan is 'free', then you are getting a good deal, right?

Wrong! Just ask the folks at the big power and engineering company ABB Group. In a recent court decision, the Company was fined over $35 million for, in part, failing to perform their fiduciary duty and monitor the fees paid by the plan. Fidelity Investments was also required to pay $1.7M to the plan.

The court held, among other things, that ABB failed to monitor its investment costs because they never calculated amounts paid to Fidelity through revenue sharing payments, and also by ignoring third party advice that revenue sharing exceeded market rates. ABB breached its fiduciary duty by failing to consider the plan's asset size, and to negotiate lower fees for plan participants, as required by its investment policy. In addition, ABB, Inc. and the benefits committee violated their ERISA fiduciary duty by having the 401(k) plan essentially subsidize costs like recordkeeping and payroll services for its health and pension plans.

While the case may be appealed by ABB and/or Fidelity, it is important to think carefully about the case and the decisions reached by the judge. Plan sponsors and their benefit committees - anyone who is a fiduciary with respect to the plan - should pay careful attention to costs and document what they think is reasonable. Because all plans are different (assets, number of participants, nature of workforce, etc.) the Department of Labor uses a 'reasonableness' standard which is deliberately vague.

So how do you, as a plan fiduciary, determine what is reasonable? First, the new fee disclosure regulations, effective July 1 this year, will be a big help. However, the best tool is an independent evaluation of all costs, services, and revenue sharing arrangements. This data can be benchmarked against other similar plans and fiduciaries can determine where they stand. Most investment service providers, unless they are signed on as a fiduciary, will probably not come to you and ask to you lower their compensation. So come to us - and find out if they should.