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Case Shines Spotlight on Bundled Retirement Plans

Plan sponsors may find it more difficult to mitigate the risk of its fiduciaries and to offer plan participants institutionally priced investment options with a product-driven bundled plan solution, writes Scott Simon of Prudent Investor Advisors.

W. Scott Simon, 06/11/2012

W. Scott Simon is a principal at Prudent Investor Advisors, a registered investment advisory firm. He also provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. Simon is the recipient of the 2012 Tamar Frankel Fiduciary of the Year Award. 

In this month's column, I'd like to drill down further into the Tussey v. ABB opinion issued by federal district court judge Nanette Laughrey at the end of March. A lot more marrow can be extracted from the bones of this case.

Please note that the following discussion pertaining to Fidelity applies only insofar as Fidelity is involved with the two 401(k) plans (PRISM Plans) sponsored by defendant ABB in Tussey. In fact, this discussion could also apply to any other large and reputable service provider to retirement plans.

Fidelity Is a Manufacturer of Investment Products
Mutual fund families such as Fidelity are--God bless 'em--unabashed capitalists. They seek to sell their investment products as cost-efficiently through as many distribution channels as they can in order to generate the largest profit possible. Edward C. (Ned) Johnson III, chairman of Fidelity Investments, is not a multibillionaire for nothing.

To help generate profits, Fidelity, for instance, manufactures investment products such as its proprietary mutual funds. Perhaps the most well known of these funds is the Fidelity Magellan Fund, which is on the menu of investment options available to participants in the PRISM Plans. (Fidelity, of course, manufactures other products, but Tussey appears to involve only mutual funds.) As a manufacturer of products, Fidelity is really no different than ABB, which manufactures power and automation equipment products.

The unforeseen development of the 401(k) plan industry beginning in 1981 presented Fidelity (and other such providers) with new and potentially huge opportunities to distribute their proprietary investment products in the retirement plan market.

A Bundled Retirement Plan Exists to Distribute Investment Products
The solution that Fidelity and other service providers to retirement plans eventually came up with to vastly expand sales of their proprietary investment products came to be known as a "bundled" retirement plan. In such a plan, different Fidelity units provide a suite of services to plan sponsors. In Tussey, for example, defendant Fidelity Management Trust Company (Fidelity Trust) is the record-keeper for the PRISM Plans, providing recordkeeping and other administrative services, including providing the trading platform for the PRISM Plans. Fidelity Trust places proprietary mutual funds--after selection by ABB--on its recordkeeping platform; these funds are provided by another Fidelity unit, Fidelity Investments (not a defendant in Tussey), and made available to participants in the PRISM Plans as investment options. Fidelity Trust is also the trustee of the PRISM Plans, providing trustee and custodial services such as safe-keeping the billion dollar-plus assets of the plans.

Yet another Fidelity unit, defendant Fidelity Management & Research Company (Fidelity Research), serves as the investment advisor to Fidelity's proprietary mutual funds that are on the menu of investment options offered in the PRISM Plans. Some blogs on Tussey note that Fidelity Research is the investment advisor to ABB pursuant to section 3(21) of the Employee Retirement Income Security Act (ERISA) (to be more precise, an advisor rendering investment advice for a fee pursuant to ERISA section 3(21)(A)(ii)). However, neither Judge Laughrey's opinion nor the case record supports this assertion.

W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He is the author of two books, one of which, The Prudent Investor Act: A Guide to Understandingis the definitive work on modern prudent fiduciary investing.

Simon provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. He is a member of the State Bar of California, a Certified Financial Planner, and an Accredited Investment Fiduciary Analyst. Simon's certification as an AIFA qualifies him to conduct independent fiduciary reviews for those concerned about their responsibilities investing the assets of endowments and foundations, ERISA retirement plans, private family trusts, public employee retirement plans as well as high net worth individuals.

For more information about Simon, please visitPrudent Investor Advisors, or you can e-mail him at wssimon@prudentllc.com

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar.

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