Specifically, U.S. District Judge Nanette K. Laughrey of the U.S. District Court for the Western District of Missouri found the ABB defendants violated their fiduciary duties to the plans when they failed to monitor recordkeeping costs, failed to negotiate rebates for the plan from either Fidelity or other investment companies chosen to be on the plans’ platform, selected more expensive share classes for the investment platform when less expensive share classes were available, and removed the Vanguard Wellington Fund from the investment menu and replaced it with Fidelity’s Freedom Funds.
Laughrey ruled that ABB breached its fiduciary duty to the plans because it failed to comply with the plans’ Investment Policy Statement that states: “At all times, [Alliance] rebates will be used to offset or reduce the cost of providing administrative services to plan participants.”
“ABB had good information about how the investing habits of plan participants might affect the availability of revenue sharing, so it had a reasonable basis for conducting such an investigation,” Laughrey wrote in her opinion. She said she was unconvinced that ABB monitored the reasonableness of Fidelity Trust recordkeeping fees by monitoring the reasonableness of the expense ratio of the retail investments chosen for the plans’ platform.
The court also found ABB Inc., and the Employee Benefits Committee violated their fiduciary duties to the plans when they agreed to pay to Fidelity an amount that exceeded market costs for plan services in order to subsidize the corporate services provided to ABB by Fidelity, such as ABB’s payroll and recordkeeping for ABB’s health and welfare plan and its defined benefit plan.
Fidelity Also Liable
According to Laughrey’s ruling, Fidelity Trust breached its fiduciary duties to the plans when it failed to distribute float income—interest earned on assets—solely for the interest of the plan, and Fidelity Research violated its fiduciary duties when it transferred float income to the plans’ investment options instead of the plans.
The court found ABB defendants jointly and severally liable for $ 13.4 million lost by the plans due to ABB’s failure to monitor recordkeeping fees and negotiate for rebates, and $21.8 million lost by the plans due to the mapping of the Vanguard Wellington Fund to the Fidelity Freedom Funds. Fidelity defendants are jointly and severally liable for compensating the plans $1.7 million for lost float income.
Laughrey rejected the plaintiffs’ global damages theory, which is based on the assumption that ABB’s breaches infected all of its investment decisions for the plans and the assumption that damages should thus be measured by the performance of ABB’s defined benefit plans. “While the court is suspicious that the relationship between ABB and Fidelity Trust infected more than the specific instances identified in this order, the court cannot rely on suspicion and therefore rejects Plaintiffs’ global damage theory,” Laughrey wrote.
Participant Ronald C. Tussey filed the suit in 2006 against ABB, alleging it breached its Employee Retirement Income Security Act (ERISA) fiduciary duties by paying excessive fees to Fidelity Trust and by failing to disclose to plan participants the revenue-sharing arrangement (see “ABB Excessive Fee Suit Survives Initial Challenge”).
The court opinion is here.