Litigators Share What They Investigate for Filing TDF Lawsuits

Litigators Share What They Investigate for Filing TDF Lawsuits

A litigation firm has listed what it is investigating for potential lawsuits over target-date funds (TDFs) in retirement plans, and an ERISA attorney make suggestions for how plan fiduciaries may avoid such suits.

By Rebecca Moore

There’s been a recent wave of lawsuits over the target-date funds (TDFs) being offered in 401(k) plans recently.

A settlement in a lawsuit accusing Franklin Templeton of self-dealing in its 401(k) plan requires it to add a nonproprietary TDF option to the investment lineup in addition to the plan’s qualified default investment alternative (QDIA)—the LifeSmart Target Date Funds. More recently, a lawsuit was filed alleging fiduciaries of the Walgreen Profit-Sharing Retirement Plan selected and kept TDFs in the plan that underperformed their benchmarks. And, last week, retirement plan fiduciaries at Intel were accused of failing to properly monitor and evaluate “unconventional, high-risk allocation models” adopted within the company’s custom target-date funds.

On its website, litigation firm Cohen Milstein says it is investigating a number of issues concerning the selection and offering of TDFs. The firm shares what it is looking for:

Improper Investment Strategy: The firm says, “The actual investment strategy (e.g. the allocation between equities and bonds) may not be same as the fund advertised.  The fund may be pursuing a far riskier investment strategy than participants and plan sponsors are led to believe, even as plan participants near retirement.”

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Zeroing In On Fiduciary Risk Factors For 401(k) Advisors

The following article was featured on Financial Advisor Magazine.

Zeroing In On Fiduciary Risk Factors For 401(k) Advisors

AUGUST 19, 2019 

 
1. How did you personally become involved in fintech and what do you do on any given day?

Like many entrepreneurs, I found myself facing a challenge in my business. There are so many opportunities to grow a successful financial advisory practice today. Advisors are inundated with product offerings, and with growing regulatory scrutiny it is increasingly difficult to operate efficiently. I wanted to create something that would improve both the workflows of fiduciary advisors and the outcomes of retirement plan participants.

As co-CEO I wear many hats and am very fortunate to have a strong experienced team surrounding me. We are constantly improving our technology—setting that agenda and vision is critical. I manage all of the recordkeeper relationships on our platform and my co-CEO and partner, Michael Steffan, has been focused on growing our footprint with advisors. 

2. What does your firm do/offer within the fintech sector?

FiduciaryShield is an end-to-end fiduciary technology serving 401(k) advisors. 401(k) Prospector is a feature that identifies fiduciary risk factors on more than 800,000 plans. Advisors can geolocate plans, search by employer, search for service providers and even identify plan decision makers and connect with them via LinkedIn.

Advisors can request proposals from more than 20 recordkeepers through FiduciaryShield. Advisors are able to download and analyze proposals with a simple and transparent interface. Automated plan monitoring reports are issued quarterly to help advisors and plan sponsors meet their ongoing requirement to monitor plan fees. All proposals, reports, forms and important documents are stored securely to help plan fiduciaries meet their obligations under ERISA.
 
3. How do you feel consumers (or if more relevant for your firm – businesses) are adapting to the facet of fintech that your company operates within?

A recent survey by the National Association of Retirement Plan Participants revealed that only 16% of participants trust financial advisors. The top driver of trust is fee transparency. Pairing transparency with a process that drives better fee results is a no brainer. Employers and advisors utilizing FiduciaryShield are very pleased with the simplicity in which critical fiduciary data is presented and how easy it is to make an informed decision.

To view the full article click here

Here's why so many workers are suing employers over 401(k) plans

Here's why so many workers are suing employers over 401(k) plans

Russ Wiles | Arizona Republic |  

You would think most investors are fairly happy with their results, 10 years into a rising stock market and with solid gains delivered by bonds, too. But that apparently isn't the case at a lot of 401(k) workplace retirement plans.

Unhappiness over high fees, inappropriate investment options and other issues have led to a spike in lawsuits in recent years, according to a study by the Center for Retirement Research at Boston College. The flip side is that many 401(k) programs have gotten better in recent years, partly because of increased litigation risk.

These trends affect nearly two in three adult workers with money invested in 401(k)-style plans, which have replaced traditional pensions as retirement mainstays in the workplace. The plans feature tax-saving benefits and allow workers to contribute money automatically from each paycheck. Many employers offer matching funds to encourage further saving.

But unlike traditional pension plans, where managers hired by employers call the shots, workers in 401(k) plans must make investment decisions on their own (although some companies provide guidance). Poor investment choices, high fees, a lack of transparency and other problems can lead to subpar results and dissatisfaction.

Backlog of cases -- 60% pending

Not surprisingly, 401(k) lawsuits, which are typically class-action cases, jumped when the economy soured and the stock market tanked roughly a decade ago.

From eight lawsuits filed against employers in 2006, the numbers surged to 18 in 2007 and 107 in 2008,  before declining for the next five years, according to the Boston College report authored by George Mellman and Geoffrey Sanzenbacher.

But since bottoming at just two lawsuits in 2013, litigation has risen again, with 56 suits in 2016 and 51 in 2017, the two most recent years tracked.

Of the roughly 430 cases evaluated by the Boston College, 60% are still pending, 20% were dismissed/closed, 16% were settled/decided, and 4% are on appeal. In an interview, Sanzenbacher said he sensed the trend of increased 401(k) litigation is continuing, though the researchers haven't included more recent numbers.

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The Secure Act

The SECURE (Setting Every Community Up for Retirement) Act passed the House recently and is pending in the Senate. There are a number of provisions of the act: some good, some bad, and some could go either way.

 

Tax Credit for Companies Starting a New Plan  (they got it right!)

 Reducing taxes while helping your employees save for retirement. A good deal for all!

 The act would increase the business tax credit for small businesses starting a new retirement plan from the current cap of $500 up to a limit of $5,000 in certain circumstances. This has the potential to encourage more small businesses to offer retirement plans. The credit is the lower of $5,000 for first 3 years or $250 times the number of non-highly compensated employees (making under $125,000 and not a 5% owner of the business). BidMoni estimates that employers can start plans for as little as $500 based on 401(k) marketplace data. This provision is certainly a win for over 1 million businesses (and their employees) without a 401(k) plan.

 

Multiple Employer Plans (MEP) ( can be good but buyer beware)

 The act has a provision that allows unrelated small employers to band together in an open multiple employer plan. This means companies that are completely unrelated can now join forces to share administrative costs and other savings. Currently employers in an MEP must have something in common such as being in the same industry, the same geographic region, etc.

 Allowing small plans to band together for more favorable pricing sounds like a no-brainer, but MEPs are not new to the defined contribution industry and aren’t without drawbacks. One includes limitations on plan design flexibility for individual companies in the MEP arrangement.

So, where have we seen MEPs before? Who remembers this New York Times article regarding the retirement plans offered to many teachers around the country? Non-ERISA plans (State Government, k-12, Universities) have had access to MEPs for decades. They not only failed to drive down costs, many are paying higher fees because of them. Let’s hope this provision doesn’t turn into the same marketing ploy that ended up taking advantage of our nation’s educators. Even with an MEP option, it’s imperative for employers and advisors to shop their options in order to evaluate the best service provider for their plan.

 

Annuity Provisions  ( fail)

 Here’s where it gets ugly. This provision pushes to continually offer annuities within a 401(k) plan as if the plan participants don’t have access to a lifetime income option anywhere else.

Almost every bank, insurance agent, broker dealer, and even RIA offer annuities. With so many different outlets available outside of a 401(k) to purchase an annuity, why would there be any justifiable need to build them into 401(k)s and waive fiduciary liability for the plan sponsors? This just seems irresponsible.

 If participants in a 401(k) want to put their money into an annuity, there are no obstacles in their way and no shortage of opportunities for them to do so without having to build it onto their plan. Employees can set up an annuity in multiple situations: upon retirement from their company, if they quit working for their company, or when they turn 59 ½ while still working.

 On the whole, employees would look to draw lifetime income after they no longer work, not while they’re still on the clock and saving for retirement. Something is amiss with forcing this into these plans. Not to mention, most 401(k)s at a plan level are already annuity platforms sold by insurance companies. The 401(k) industry doesn’t lack annuities, it actually needs far less of them.

 I applaud Congress for addressing the retirement crisis and there are potential benefits to some of these provisions but more transparency and attention to detail is needed to ensure the best interest of employees is truly at the forefront of this legislation

Fidelity Responds to Allegations of Secret Kickback Payments

Recently, Fidelity found themselves making headlines for reasons they probably wish they weren't.  They are currently facing investigations and multiple lawsuits regarding their fee arrangements with the various investment managers offered via the Fidelity FundsNetwork platform.

 

Is Fidelity a fiduciary?

 

Does Fidelity's fee practice meet ERISA's strict reporting guidelines?

 

What do you think?

 

      

 

Fidelity says it's entitled to alleged 'secret payments' in 401(k) plans
Given the thin margins in the retirement business, firm says it was justified in cutting deals with money managers to boost profits


Jul 9, 2019 @ 2:51 pm

By Greg Iacurci
  
Fidelity Investments said it is legally entitled to payments it receives in connection with 401(k) investments and that the collection of such fees has become necessary for record keepers given the prevailing economics of the industry.

 
Fidelity, the largest record keeper of workplace retirement plans, made these claims in a filing asking a federal court to dismiss a lawsuit alleging the fees caused the Boston-based firm to profit at the expense of customers' retirement savings and breached its fiduciary duty.

 

A participant in T-Mobile USA Inc.'s 401(k) plan, Andre W. Wong, sued Fidelity in February, claiming that mutual funds and other investment products offered through Fidelity's FundsNetwork platform are required by the firm to pay "kickbacks" if revenue-sharing payments made to Fidelity fall below a certain level.

 

Those payments, Mr. Wong argued, increase investment costs for participants and weren't properly disclosed. Other plan participants have since filed similar class-action lawsuits against Fidelity.

 

Addressing their consolidated complaints, Fidelity said plaintiffs "try to dress up their claims by repeatedly referencing 'secret payments' or 'secret kickback payments.'"

 
However, the fee is nothing more than an "arm's length" payment negotiated with certain money managers, and such compensation negotiations don't mean Fidelity is acting as a fiduciary, the firm said. Fidelity negotiated its "infrastructure fees" with asset managers on the FundsNetwork platform in 2017.

 

In addition to legal reasons, there are "practical" justifications to reject the notion that Fidelity has fiduciary status, the company said, due to squeezed profits among record keepers.

 

"As is clear from the public record, retirement plan service providers operate at increasingly thin margins, and to continue in business they must negotiate arrangements that allow them some amount of profit," Fidelity said in the filing, made July 1 in the U.S. District Court of the District of Massachusetts.

 

"If plaintiffs' view of fiduciary status were correct, then service providers like Fidelity could not profit from the services they provide to plans: They could not charge the plans anything more than cost," it added. "If that were the case, there would be no service providers left in business."

 

More of these sorts of fee arrangements are cropping up between record keepers and asset managers. Empower Retirement, for example, last year launched a platform called Empower Select, requiring mutual-fund providers to pay for fund distribution, which also helps Empower offer the product to small and midsized 401(k) plans at a reduced price point. The platform has some requirements around use of in-house investments, advisers said.

 
Principal Financial launched a product in May that also requires clients to use some proprietary funds.

 

Such moves are largely in response to fee compression, advisers said. Median record-keeping fees have fallen by half over the past decade — to $59 per participant in 2017 from $118 in 2006, according to consulting firm NEPC.

 

Further, plan sponsors and their advisers have shifted away from using record keepers' in-house investments due to fiduciary concerns, depriving the firms of more revenue.

 

"I think the pendulum has swung so far one way, starting a number of years ago with the move away from proprietary products, I think it's swinging back the other way," said Brady Dall, an adviser at 401(k) Advisors Intermountain.

 

Fidelity has been targeted in other fee lawsuits in the past. One, for example, alleged the firm took payments from managed account provider Financial Engines. That suit was ultimately dismissed.

 

The firm also gained attention last year for charging some employers a fee on 401(k) assets held in Vanguard Group investment funds, which some advisers felt was meant to push clients to adopt its own funds more readily.

 

Webinar Replay: Stress Free 401(k) Prospecting

00:00     Intro/Finovate Announcement
02:25     Subscription Options
03:00     401(k) Prospector
04:05     Example 1:  GE 401(k) Overview Page
05:00     Connecting to GE HR Manager on LinkedIn
10:30     Example 2:  Norfolk Hardware 401(k) Overview Page
11:30     Connecting to Norfolk Hardware HR Manager on LinkedIn
13:30     LinkedIn Messaging Ideas
 
 

BidMoni to Demonstrate FiduciaryShield at FinovateFall 2019

BidMoni has been selected as a product demonstrator for FinovateFall 2019 to demonstrate the many ways FiduciaryShield is changing how advisors engage the 401(k) market.

Finovate showcases the top tech innovations and provides a unique insight into the future of the fintech industry.

CEO Stephen Daigle will be providing a live demonstration of FiduciaryShield within the 7-minute Finovate format.

We will showcase how FiduciaryShield connects advisors with 401(k) plan decision makers via LinkedIn and maximizes their social influence while prospecting for new business.

We will also demonstrate the benefits of our independent RFP platform and how it improves advisor workflows and client outcomes with a simple and transparent user interface.

FinovateFall 2019 will be held in New York City from September 23-25.  For more information about Finovate visit their website at https://finance.knect365.com/finovatefall/

5 Ways FiduciaryShield Helps Advisors Win 401(k) Plans

FiduciaryShield launched in 2018 to support the fiduciary requirements of those managing employer sponsored retirement plans.  We are excited to launch our newest product feature – 401(k) Prospector.  Registering with FiduciaryShield gives advisors access to unparalleled technology designed to support the full lifecycle of 401(k) plan management. From plan prospecting --> plan proposal --> plan onboarding --> plan monitoring – the tools you need to win more 401(k) plans are all here. 

401(k) Prospector 

We launched 401(k) Prospector this year as a tool to help advisors identify potential 401(k) business opportunities.  401(k) Prospector highlights all plans filing an annual Form 5500 within 10 miles of an advisor's office.  A national plan search can also be conducted by either the employer name or plan name.  Our database contains information on over 800,000 plans helping advisors identify important plan information such as total plan assets, total participants, and key plan contacts.  Plan contacts are even identified on LinkedIn, giving advisors another opportunity to connect. 

Retirement Plan Wellness Reports 

Retirement Plan Wellness Reports are designed to help advisors identify fiduciary risk factors through annual Form 5500 filings.  Wellness Reports empower advisors to be fiduciary experts by helping to identify more than 20 ERISA-specific fiduciary risk factors on a plan by plan basis.  Advisors can easily identify important changes in plan demographics that may trigger the need for a plan fiduciary to review plan fees or conduct a competitive request for proposal. 

Competitive Proposal Requests 

FiduciaryShield offers a competitive request for proposal platform allowing advisors to request proposals from more than 20 active recordkeepers.  Recordkeepers who receive a proposal request through FiduciaryShield are aware they are bidding on a competitive opportunity, approved by the employer, and have agreed to customize their proposal responses within seven days of the request being submitted.  

Transparent Analysis 

Proposals submitted by recordkeepers through FiduciaryShield are presented to advisors in a simple and transparent format, allowing advisors to easily compare proposals side by side.  Leveraging FiduciaryShield’s technology allows advisors to present a visually compelling comparison of a plans features, investment offerings, and fees. 

Document Procedures & Monitor Providers 

ERISA requires plan fiduciaries to put proper controls in place which support both monitoring service providers and documenting fiduciary procedures.  All requests for proposal, proposal responses, forms, and reports are documented to help meet ERISA regulations.  FiduciaryShield also automates quarterly and annual plan monitoring reports to help advisors and plan sponsors meet their ongoing requirement to monitor providers.   

 

Plan Sponsor Guide to Choosing Form 5500

Under the provisions of ERISA, most 401(k) plans are required to annually file a Form 5500.  Although many plan sponsors have this prepared for them by a retirement plan service provider, they should be familiar with the requirements.  Understanding these requirements can help plan sponsors monitor plan service providers – an important fiduciary responsibility. 

Currently the federal government offers three versions of the Form 5500.  Which form a plan should use is generally based on the plan's participant count.

Form 5500-EZ

Required for “solo 401(k) plans” which covers a business owner and their spouse.

Form 5500-SF

Required for “small 401(k) plans” which covers plans with less than 100 participants on the first day of the plan year that meet the following requirements: 

  1. The plan satisfies DOL independent audit waiver requirements 
  2. The plan is 100% invested in “eligible plan assets” with readily determinable fairvalue (e.g., mutual funds, variable annuities) 
  3. The plan holds no employer securities

Form 5500

Required for “large 401(k) plans” which covers plans with more than 100 participants and small 401(k) plans that don’t meet the Form 5500-EZ or SF filing requirements. 

Plans that meet the requirements to file Form 5500 must also file certain schedules and/or attachments as seen below.

 

The 80-120 Rule

There is one exception to the Form 5500 filings known as the “80-120 participant rule”.  This allows any plan which filed in the previous year as a “small plan” and still has under 120 participants to continue to file as a “small plan”.  But if the number of eligible plan participants reaches 121 by the first day of a plan year, it is no longer subject to the “80-120 participant rule”. 

This is an important provision for plan sponsors to understand because all 401(k) plans that filed a Form 5500 as a “large plan” are required to be audited annually by an independent, external accounting firm.  An audit requirement can add thousands of dollars to the cost of filing a Form 5500.  Strategies, such as cashing out small account balances related to terminated plan participants, can typically be leveraged to mitigate a plan’s participant count avoiding this requirement and additional cost. 

Avoid These Penalties

A failure to properly report an annual Form 5500 can increase the likelihood of a Department of Labor audit and/or substantial financial penalties levied against the employer.  Employers that file a late Form 5500 are subject to the following penalties: 

  1. The IRS penalty for filing a late 5500 is $25 per day, up to a maximum of $15,000. 

  2. The DOL penalty for filing a late 5500 is indexed for inflation and can run up to $1,100 each day, with no maximum. 

Many employers faced with these penalties often don’t even realize they’ve missed a filing until they’ve been contacted by the IRS or DOL.  Of course, by that time, significant penalties will have already accrued.

The DOL does offer a program for employers who have not yet been notified to voluntarily report a late or missing Form 5500.  Through the DOL’s Delinquent Filer Voluntary Compliance Program (DFVCP) the maximum penalty for a single late Form 5500 is $750 for “small plans” and $2,000 for “large plans”.  The DFVCP also includes a “per plan” cap of $1,500 for “small plans” and $4,000 for “large plans”. 

More information about the filing requirements are provided by the DOL’s Reporting and Disclosure Guide for Employee Benefit Plans.