ABB, Inc., a manufacturer of power generation and distribution equipment, has been ordered by a federal judge to pay over $35 million in damages to participants in its 401(k) retirement plan. The company was found to have breached its fiduciary obligations in two ways: by charging excessive fees in order to save money in other areas, and by switching its funds for other reasons than to provide more value.
The company hired Fidelity Investments as its 401(k) provider while also using the company for payroll and benefits processing. The 401(k) service was found to have been partially paid through administration fees but also through the use of profits generated by the 401(k) funds. This behavior is legal, but the judge found that ABB let Fidelity charge excessive fees in trade for discounted payroll and benefits services. To some extent, the judge agreed with the plaintiff’s lawyer who argued that the two companies used ABB’s employee retirement assets for their own benefit.
Secondly, ABB switched from a Vanguard fund to a Fidelity fund not, as the company argued, to provide more value for plan participants, but to boost profits earned by Fidelity in exchange for discounted services. In his ruling, the judge noted that the Vanguard fund was not underperforming and ABB made no effort to investigate other funds besides Fidelity. Not only does the ruling order ABB to pay $35.2 million in damages, but Fidelity has also been fined $1.7 million for its participation in the scheme.