There’s a Limit to Reliance on Service Providers

Service providers for defined contribution plans have increasingly taken on responsibility for the plans.

However, there’s a limit to how much a plan sponsor should rely on service providers to handle and advise about administration and investments. The case of Tussey v. ABB is a lesson for retirement plan committees, Fred Reish, chair of the Financial Services ERISA team, at the law firm of Drinker, Biddle & Reath, told attendees at the 42nd Annual Retirement & Benefits Management Seminar, hosted by the Darla Moore School of Business of the University of South Carolina, and co-sponsored by PLANSPONSOR.  

Reish noted that in the Tussey case, ABB plan participants sued the company, its retirement plan committee, the plan’s recordkeeper and others, and that the court found the defendants violated their fiduciary duties to the plan by failing to monitor recordkeeping costs, failing to negotiate fee rebates for the plan from the recordkeeper or other investment companies, and selecting more expensive share classes when less expensive share classes were available (see “Upfront: Breach of Duty”). Reish pointed out that the committee had a report from a consultant saying fees for the plan were reasonable, but it never asked what the recordkeeper was being paid.   

“Tussey created a ‘duty to ask’,” Reish said, noting that many plan sponsors think service providers are fiduciaries to the plan, but most are commercial businesses working in their own interests. Plan committees have the responsibility to determine what the service providers are being paid and whether the fees are comparable with market value, he added.  

Reish speculated: Do sponsors know about different share classes and revenue sharing? In addition, courts are beginning to say plan sponsors have to consider the purchasing power of the plan, and not only know average expense ratios for certain fund types, but average expense ratios for fund types for plans of similar size. This is why plan advisers and consultants need to step in and educate plan sponsors and help them with negotiations, Reish said.