Compliance August 6, 2013

Fidelity Cleared of Excessive Fee Violation

A federal appeals court affirmed the dismissal of a lawsuit against Fidelity Management Trust Company regarding excessive fees.
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In the case of Danza v. Fidelity Management Trust Co. (2013 WL 3872118), the 3rd U.S. Circuit Court of Appeals found that the U.S. District Court for the District of New Jersey was correct in dismissing the suit which alleged Fidelity violated various provisions of the Employee Retirement Income Security Act (ERISA) by charging participants of Danza’s retirement plan excessive service fees for reviewing Domestic Relations Orders (DROs).

Danza’s employer A&P contracted with Fidelity to provide recordkeeping and administrative services for the plan. A schedule of the plan listed fees that Fidelity would charge for its services, including fixed fees for DRO services to be paid by plan participants.

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Citing Renfro v. Unisys Corporation, the court determined that “at the point Fidelity was negotiating its fees with A&P, it was not a fiduciary of the plan and owed no duty to plan participants to defray reasonable expenses of administering the plan.” It also found at the time Fidelity and A&P signed the trust agreement “Fidelity was not then a fiduciary and therefore could not be considered a co-fiduciary under Section 405 [of ERISA].”

The 3rd Circuit said Danza needed to prove that a prohibited transaction occurred between the plan and a party of interest, with parties of interest including fiduciaries, employers, employees, service providers and certain stockholders. The court pointed out that while Fidelity is currently a party of interest as a service provider of the plan, it was not at the time the trust agreement was signed.

Finally, the court found that at the time Danza was charged the DRO fee, “the fee structure was set and Fidelity lacked discretion to change it” and therefore was not in violation of Section 406(b).

The full text of the opinion can be found here.

Compliance August 6, 2013

Brokerage Must Repay Plan Participants, Beneficiaries

An insurance brokerage firm must repay more than $270,000 to the participants and beneficiaries of a Florida-based retirement plan.
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The U.S. Department of Labor (DOL) recently obtained a consent judgment ordering Plymouth Meeting, Pennsylvania-based Dietrich & Associates Inc. and its CEO and sole shareholder, Kurt E. Dietrich to return $272,722 to plan participants and beneficiaries. The DOL alleged that Dietrich and his firm obtained the compensation inappropriately when providing services to an Employee Retirement Income Security Act (ERISA)-covered retirement plan sponsored by Memorial Hospital-West Volusia Inc. in Deland, Florida.

The judgment resolves a lawsuit filed by the DOL (Perez v. Dietrich & Associates Inc. et al, Civil Action Number 2:12-cv-04910) following an investigation by the Employee Benefits Security Administration (EBSA), which found ERISA violations.

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The DOL filed the lawsuit in September 2012 in the U.S. District Court for the Eastern District of Pennsylvania, alleging the defendants violated ERISA when the retirement plan contracted Dietrich & Associates to act as its fiduciary and obtain bids from insurance companies for a termination annuity for a fee of $50,000. It also alleged that the company failed to disclose to plan fiduciaries a pre-existing arrangement with Hartford Life Insurance Co., the insurance company that won the bid, which entitled Dietrich & Associates to receive additional undisclosed compensation. The case was litigated by the department’s Office of the Solicitor in Washington, D.C.

“The department was prepared to prove that the defendants took advantage of their position with the plan to earn undisclosed payments from the plan’s insurance company,” said Marc Machiz, EBSA’s regional director in Philadelphia. “We are pleased with the consensual resolution of the litigation, which sends a clear message that plan fiduciaries will be held accountable when they don’t act in the best interest of the plan and its participants.”

In addition to repaying the $272,722, plus a $27,273 penalty, the judgment requires the defendants to enter into written agreements, which disclose all information required by the law with any ERISA plans they service in the future. The judgment also requires the defendants to ensure that any entities they control in the future comply with the requirements of the consent order.

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