Moving Forward

A federal judge in Missouri has determined that the fiduciary breach lawsuit over excessive fees and revenue-sharing practices in ABB’s 401(k) plan, filed by the St. Louis-based law firm of Schlichter Bogard & Denton on behalf of the plan’s participants, can move forward.

U.S. District Judge Nannette K. Laughrey of the U.S. District Court for the Western District of Missouri also ruled that the claims that the plan’s investment adviser and directed trustee breached their Employee Retirement Income Security Act (ERISA) fiduciary duties could move forward. Laughrey contended that, though ERISA does not require disclosure of revenue-sharing arrangements, ABB could be found to have breached its fiduciary duties.

The court rejected ABB’s argument that, because it had made its required ERISA disclosures, it was immunized under 404(c) from any claimed fiduciary breaches. Laughrey said 404(c) could be raised as a legal defense at trial but not when considering a pre-trial request to throw out the case.

The court also found that the plan’s directed trustee might be liable as an ERISA fiduciary because there was evidence it directly managed the mutual funds that made up approximately half of the investment options available to plan participants. The plan’s investment adviser likewise might qualify as an ERISA fiduciary because it “indirectly” exercised discretion over plan assets by paying its affiliate, the directed trustee, to steer the plan toward mutual funds offered by the adviser, Laughrey ruled.

The court rejected Fidelity Trust and Fidelity Management’s argument that participants had not put forward a strong enough case: “Plaintiffs have set forth specific facts that the Fidelity Defendants charged ABB per-participant fees significantly in excess of rates paid by similar plans; that the Fidelity Defendants offered investment options whose sub-asset classes “may create participant confusion in selecting options”; the weighted average expense ratio was high compared to peer plans; and that the Fidelity Defendants subsidized services provided to ABB through revenue-sharing.”

Participant Ronald C. Tussey filed the suit against ABB alleging it breached its ERISA fiduciary duties by paying excessive fees to Fidelity Trust and by failing to disclose to plan participants the revenue-sharing arrangement. In December 2007, the district court certified the lawsuit as a class action.

According to the opinion, ABB selected Fidelity Management Trust in 1995 as the plan’s directed trustee. The agreement required that ABB get the consent of Fidelity Trust before choosing investment options for the plan and that Fidelity Trust could withhold its approval about any investment option it or its affiliates did not manage or operate. The opinion said Fidelity Trust was paid directly based on the number of participants or transactions and also received revenue-sharing payments from investment option providers.

*Illustration by Brian Stauffer