The original “excessive fees” case—first filed in 2006—finally concluded on March 28 with a $55 million settlement for the plaintiffs, one of the largest ever awarded in 401(k) fee litigation.
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Tussey v. ABB, after winding through earlier settlement awards to the plaintiffs, two appellate hearings in the 8th Circuit, and double rejections by the U.S. Supreme Court, ultimately will be remembered both as a case about plan sponsors’ fiduciary duties and one that defined how to quantify participant losses from related breaches.
As a result, the retirement plan industry has moved in a unified way to press for reductions in service provider fees, opt for lower-cost share classes, and insist upon greater transparency for recordkeeping and asset management costs.
Breakdown of Settlement Award
Of the total settlement award, $20.8 million, or nearly 40 percent, will go toward attorneys’ fees and litigation costs. The lawsuit was brought by plaintiffs’ counsel Schlichter Bogard & Denton of St. Louis, which went on in subsequent years and many similar court filings to make this type of Employee Retirement Income Security Act (ERISA) litigation against employer plans its signature work.
Three named class representatives in the two ABB 401(k) plans in the case will be awarded $25,000, and the remainder will be paid out to plan participants in the class period from December 29, 2000, through December 31, 2007.
The settlement also requires ABB to conduct a search for recordkeeping services, rebate any revenue-sharing fees back to plan participants, and employ the “loyal selection” of 401(k) investments going forward, according to a court document. Several similar non-monetary remedies addressing plan fee and fund bidding reform were ordered over the years as the suit appeared and reappeared in federal courts.
In the late March settlement documents, both parties in the suit asked the court to schedule a final fairness hearing, then an order granting final approval of the agreement.
Background of the Case
Among other things, the lawsuit claimed that ABB had failed to monitor excessive recordkeeping fees, and that plan fiduciaries had engaged in self-dealing when they replaced Vanguard’s Wellington Fund target-date series with Fidelity’s Freedom Funds. The plaintiffs alleged that Fidelity, the ABB plan recordkeeper, gave ABB a break on pricing for plan services after the link to Fidelity funds was established.
In 2012, the plaintiffs won a $36.9 million judgment, which was then appealed in two actions filed with the 8th U.S. Circuit Court of Appeals in St. Louis. The case also was twice remanded to a federal district court for additional proceedings.
Float Income Controversy
In 2012, a judge in the U.S. District Court for the Western District of Missouri agreed with the Tussey plaintiffs that Fidelity had breached its ERISA fiduciary duty in several respects, including the misallocation of float income from two defined contribution 401(k) plans that ABB managed for employees.
Because revenue made from assets of these plans was not allocated solely to its plan participants, the court concluded that the Fidelity defendants’ improper treatment of float income was in violation of ERISA.
The Tussey lawsuit also was noted for the cautionary lesson it offers for plan sponsors’ handling of investment policy statements (IPS). In the case, ABB had implemented an IPS that called for selection of the lowest-cost available funds for its investment menu but failed to follow the terms of the document, which led, in part, to its initial loss in court and ultimate judgment in favor of the plan participant plaintiffs (see related March column).