Editor's Note: Today's post comes to us from guest contributor Steve Gifford.
Last month ABB, Inc.’s CFO got to write a $30M check to the US Treasury, as punishment for things that their 401k Committee had done. Here’s how you can avoid that somewhat awkward check request.
(It’s important to note here that I’m not an attorney, and have only ever played one on television, ironically. If this blog is your only source of ERISA legal advice, you’re doing it wrong).
ABB was sued by its employees for breach of its fiduciary duties under ERISA. The case is Tussey v. ABB, Case No. 2:06-CV-04305-NKL from the Western District of Missouri. To summarize 88 pages of legal opinion, here were the two major breaches:
- ABB used Fidelity as the recordkeeper for its 401k, and also used Fidelity for payroll and benefits management. The 401k was paid for partly through fixed admininistration fees, and partly through a percentage of the upside of the fund. Legal, and reasonably common, so far. However, the judge concluded that ABB allowed Fidelity to overcharge on 401k fees (taken from employee profits) in exchange for a discount on the payroll and benefits processing.
- ABB dropped a Vanguard Wellington mutual fund in exchange for a Fidelity Freedom Fund, and mapped all of the Vanguard Wellington participants to the new Fidelity fund. The judge found that the Vanguard Wellington fund was not underperforming by their standards, and that the investment committee failed to look at other options besides the Fidelity Freedom Fund – her ruling actually calls it “scant” and “cursory”. She concluded that the fund wasn’t replaced to provide more value, but was replaced because Fidelity would make more money from the fund, and charge ABB less in fees.
In fairness to the other party in this case, Fidelity itself walked away from this with only $1.7M in fines on what amounts to a technicality; the finger points directly at ABB. So, what should you learn from their experience?
1. Investment committee. At ABB, three people oversaw this 401k portfolio of $1.4B in assets. Moreover, the committee seems to have been dominated by its chairman, who is also the head of benefits. Your committee needs to be bigger: it definitely needs people from outside HR who will challenge the prevailing wisdom, and an outside director would not be out of place there. If you don’t feel comfortable telling the salesperson from your recordkeeper that he’s wrong, recruit someone who is.
2. Vendor Diversity. Be very careful about putting all of your faith in one vendor. Every payroll company out there has a recruiting “solution” and a benefits “solution” for you, and your Worker’s Comp carrier would love to bid on your medical insurance business as well. The more “efficiency” you gain from this kind of consolidation, the harder it is to pull away from that vendor, or put just one business line out for a competitive bid.
3. Fiduciary Responsibility. You are legally responsible for taking care of your employees’ money when you’re the fiduciary. That means that the competing corporate interests you have the rest of the time don’t apply when you’re working on fiduciary matters. I’m confident that ABB never sat down and said, “You know, we could reduce our payroll costs by letting Fidelity take more money from employee stock fund profits!”, but that’s what their actions amounted to. You can’t set up a payroll deduction to pay for payroll, and you can’t use 401k fund money that isn’t yours to begin with.
Steve Gifford is the Director of Human Resources for Eurpac Service, Inc., a diversified Retail and Grocery brokerage. When he has HR thoughts that aren’t about ERISA, he blogs about them over at Fistful of Talent.
Image courtesy of corporatelaw.jdsupra.com
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