Plan Sponsors Should Create a Realistic IPS

Plan sponsors and fiduciaries can learn from federal court findings in Tussey v. ABB Inc., and should avoid overly detailed investment policy statements (IPS), a white paper asserted.

The court found that ABB’s plan sponsor and other plan fiduciaries failed to follow the plan’s IPS; failed to monitor recordkeeping costs paid through revenue sharing and hard dollars, and to negotiate rebates for the plans; failed to prudently deliberate before removing and replacing investment options in the 401(k) lineup; selected more expensive share classes for the plan’s investments when less expensive ones were available; and allowed revenue sharing from the 401(k) plans to subsidize unrelated corporate services. (See “Employer to Pay for Failing to Monitor RK Costs.”)

This case can teach valuable lessons, according to Janus Capital’s white paper, including that fiduciaries should routinely review and revise the IPS to ensure that their fiduciary actions are consistent and the IPS is up to date and reflects both the plan sponsors’ intent and the new regulatory environment. Plan sponsors and their advisers should also ensure that the IPS is not overly detailed and restrictive as to cause unintended liability. They should continue to remain vigilant by developing an ongoing process for determining whether plan fees are reasonable in light of the services provided, and thoroughly documenting the basis for all investment decisions.

The white paper outlines other lessons plan sponsors and fiduciaries can learn from this case including:

Fiduciaries have an ongoing obligation to monitor plan fees: A November 2005 Mercer report showed that ABB overpaid for Fidelity’s plan recordkeeping services, and ABB fiduciaries ignored the analysis and its conclusion that fees were too high. It also showed that the revenue sharing from the 401(K) plans appeared to be subsidizing other services provided to ABB by Fidelity (including recordkeeping for the company’s defined benefit plan, its deferred compensation plan, its health benefits and its payroll). Plan assets cannot be used to subsidize other employer plans because it is a violation of ERISA’s “exclusive benefits rule.” 



Fiduciaries should prudently select and remove investment options: The court determined that the ABB fiduciaries violated their duty of prudence when they failed to follow their own IPS requirements for the selection and removal of an investment fund, choosing more expensive funds to avoid paying a per-participant hard-dollar recordkeeping fee.

Fiduciaries should adhere to plan documents: The court also found that the plan’s IPS required that any rebates associated with plan investments would be used to offset or reduce the cost of providing plan administrative services. It concluded that revenue sharing would have been considered a rebate. Rather than offsetting the administrative costs of recordkeeping as provided in the IPS, all revenue sharing was paid to Fidelity. The IPS also required that when the plan was offered a choice of mutual fund share classes, the class with the lowest cost of participation should be selected.

Additional tips from the white paper include:

  • Consider how the plan size might be used as leverage in a negotiation for lower fees;
  • Benchmark the fees and expense ratios before deciding to pay for recordkeeping through revenue sharing;
  • Regularly benchmark the cost of plan services to obtain current independent data on the going market price for services;
  • Determine whether the revenue sharing and other payments are reasonable in light of the services provided; and
  • Ensure that one employer plan is not subsidizing the services provided to another plan, where bundled providers offer multiple services and receive compensation through revenue sharing.