A federal judge has ordered an employer to pay $35.2 million in damages after it was sued by participants in its retirement plan. Here’s what got the company in trouble.

ABB, Inc., a maker of power generation and distribution equipment, was found to be in breach of its fiduciary duties for two reasons:

  • Used a plan with excess fees to save money elsewhere. ABB used Fidelity Investments as its 401(k) plan provider. It also used Fidelity to process its payroll and benefits. ABB and its employees paid for the 401(k) service partly through fixed administration fees, and partly through giving Fidelity a cut of the profits the 401(k) funds generated — all of which is legal. However, the judge concluded that ABB allowed Fidelity to charge excessive 401(k) fees (taken from employee profits) in exchange for a discount on the payroll and benefits processing. That’s a big no-no. The trial lawyer for the employees said this amounted to ABB and Fidelity using employees’ retirement assets to benefit themselves. And if the amount of the fines tells us anything, it’s that the judge didn’t disagree.
  • Switched funds — but not to provide more value. ABB stopped using a Vanguard fund in which its employees’ retirement funds were placed and began using a Fidelity fund. But the judge said the decision was not to provide more value to ABB’s plan participants, it was to help Fidelity make more money so it would charge ABB less for other services. The judge said Vanguard’s fund wasn’t underperforming, and ABB failed to look into other funds besides Fidelity’s. That was strike two.

In addition to the $35.2 million in damages ABB was slapped with, Fidelity was hit with $1.7 million in fines as well.

Cite: Tussey v. ABB, Inc.


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