It is fundamental to a trustee’s duties to ensure that expenses incurred by the plan are fair and reasonable. However, when a plan is using one vendor to provide a bundled solution representing various services, determining whether the plan is paying “fair fees” is difficult. But just because it is hard does not mean it should not be done.
“ERISA imposes upon fiduciaries twin duties of loyalty and prudence, requiring them to act solely in the interest of [plan] participants and beneficiaries and to carry out their duties with the care, skill, prudence, and diligence under the circumstances” (Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 595 (8th Cir.2009)).
Being able to define who is being paid what by whom and whether these payments are fair and reasonable is implicit in the trustee’s duty of prudence under ERISA §404a-1 and is specifically required by the U.S. Code §1104(a)(1)(A)(ii).
A plan trustee does not have a duty to “scour the market to find the fund with the lowest imaginable fees” (Hecker v. Deere & Co., 569 F.3d 708, 711 (7th Cir.2009)). But the trustee DOES have a duty to determine whether the fees being incurred for the various services provided are reasonable and appropriate.
Some trustees erroneously believe that if the plan is a self-directed 401k, with various products with differing fees available to the participants, a fee study is not needed. The court in Tussey said this belief is misplaced. Trustees for all plans, be they self-directed 401k plans, defined contribution plans, or defined benefit plans, are bound by this same duty to incur only reasonable expenses.
At the heart of Tussey v. ABB, Inc., 746 F. 3d 327 – Court of Appeals, 8th Circuit 2014 is the argument that the “revenue sharing” fee agreement with the bundled service provider can, in some cases, unfairly compensate the vendors – in this case, Fidelity. The plaintiffs in Tussey argued that as the plan assets increased, the “revenue sharing” fees paid to Fidelity increased with no additional services being provided to the plan, which effectively resulted in more fees being paid for the same recordkeeping services. (Tussey v. ABB Inc., on remand to the district court following the 8th Circuits 2014 decision)
Fortunately, the case of Tussey gave us a roadmap for what a fiduciary should be checking. A prudent fiduciary will do the following: “(1) calculate the amount the plan was paying the vendor for services through revenue sharing, (2) determine whether the vendor’s pricing is competitive, (3) adequately leverage the plan’s size to reduce fees, and (4) make a good faith effort to prevent the subsidization of administration costs of the sponsor’s corporate services with plan assets” (Tussey v. ABB, Inc).
A prudent ERISA fiduciary will create a record that demonstrates an understanding of their duty to pay only reasonable fees and that a procedure has been adopted and executed which incorporates the four-part procedure outlined in Tussey.
Anodos helps plan trustees develop, maintain, and manage their governance processes. Our support helps trustees and plan committees save time, reduce their personal risk, and fulfill their duties of care. What makes us unique is that providing fiduciary governance support is all that we do. We don’t manage money, sell insurance, or accept revenue sharing fees. We don’t have a horse in the race.
Josh Yager, Esq., CFP®, ChFC®
Anodos helps trustees (ERISA, individual, and endowment) save time, reduce their personal risk, and fulfill their fiduciary duties. We do this by helping the trustee conduct audits of the money managers to whom investment duties have been delegated. Fiduciaries have an affirmative duty to provide ongoing and independent oversight of the money managers. What makes us unique is that we do not manage money or sell insurance. Doing fiduciary audits, benchmarking studies, and performance attribution is all we do.
We do what trustees should do, but don't know how
Anodos develops and maintains an investment governance process for trustees so that their fiduciary duties are fulfilled.