Retirement plan litigation is on the upward trend with no signs of slowing down. Most of these cases involve excessive fee or proprietary fund claims. Many defendants are settling for millions of dollars to avoid a jury trial. A recent hospital group settled for $107 million.* No plan sponsor is immune from these class action suits. They all must take action to avoid the scrutiny of a professional litigator who is trolling the Internet in search of plan participants who are willing to become part of the class.
What should retirement plan advisors do to help their clients reduce the risk of future expensive legal battles to defend their fiduciary duty? Here are five questions you should be asking each recordkeeper that provides services to your plans:
1. Proprietary Funds
Does the recordkeeper have their own funds or stable value/fixed accounts on the fund menu? If so, do they offer discounted pricing if those funds are included? Do the funds stand up to rigorous fiduciary review and fee benchmarking? If there are other funds on the menu that offer similar performance, fee, and style characteristics, it might be prudent to avoid the proprietary funds altogether. Many lawsuits have been filed challenging the use of proprietary funds in defined contribution plans.
2. Share Class
Does the recordkeeper provide access to the least expensive share class of each fund? Many recordkeepers require more expensive versions of each fund to be selected to allow them to capture revenue sharing from the fund. This approach favors certain fund families over others as not all families offer revenue sharing funds. Collective Investment Trusts (CITs) should be part of the decision process as many times they offer the same fund in a lower cost package. If your recordkeeper does not offer access to CITs, you might be putting your client in a risky fiduciary position.
3. Revenue Sharing
Does the recordkeeper retain revenue sharing as part of their fee? Many recordkeepers price their plans on the assumption they will keep all revenue sharing from the funds. This pricing creates an environment where some employees are paying more than others because they have selected funds with revenue sharing. Best practice is to avoid revenue sharing and 12b-1 funds altogether so there is a level playing field. If that is not possible, all revenue sharing should be credited back to each employee using that fund, so employees are each paying a fair share of investment and plan expenses.
4. Infrastructure Payments
Is the recordkeeper receiving undisclosed revenue from fund families? As revenue sharing payments and proprietary fund income has dropped to recordkeepers, new forms of payments have been created. One of these is the so called “infrastructure payment”. Large recordkeepers are selling shelf space on their platform by requiring these payments from the fund families in order to remain on the platform. Some fund families have refused to do so and as a result, the recordkeeper has begin charging the plan sponsor for the use of that family. This practice might be unethical and even illegal under ERISA. All such payments should be disclosed by the recordkeeper so the plan sponsor can determine if they are taking additional fiduciary risk with such arrangements. Keep in mind that in most cases the recordkeeper is not a fiduciary to the plan, so the plan sponsor would ultimately be liable for any potential fiduciary breach. You as the plan advisor may also become party to the suit.
5. Fixed Account Margin
What does the recordkeeper credit to the participant? If a recordkeeper is requiring the use of their proprietary fixed account or stable value fund, what is the net rate credited to each employee? You must compare this to the marketplace of similar investments and determine if it is a prudent selection. If employees are receiving a much lower rate than the market, the recordkeeper is keeping the difference as additional revenue. In many plans the fixed account balance can be 30% to 50% of total plan assets, which could create an under-count of the total plan fees and result in the employees/plan sponsor paying more for services than is reasonable under ERISA.
Plan advisors are the first line of defense for plan sponsors trying to navigate the murky waters of ERISA and IRS regulations. Selecting a prudent open-architecture recordkeeper with fully transparent pricing and no proprietary funds is a good step towards creating the right fiduciary environment for the plan sponsor. For more information, contact Joe at email@example.com.
Joe Long is a regional sales director for BPAS and has over 30 years of experience consulting on Defined Contribution, Cash Balance, Defined Benefit, and non-qualified retirement plans. Joe works closely with trust departments and financial advisors on building successful and profitable retirement plan practices and consults in the areas of fiduciary services, plan design, investment analysis, and more.
BPAS is a national provider of retirement plans, benefit plans, fund administration, and collective investment trusts. We support 3,800 retirement plans, $77 billion in trust assets, $1 trillion in fund administration, and more than 450,000 participants. With our breadth of services, depth of creative talent, and financial resources, we are well positioned to help our clients solve all their benefit plan challenges without the need to engage multiple providers. One company. One call.
BPAS is a wholly-owned subsidiary of Community Bank System, Inc. (CBSI, NYSE: CBU).
* Saint Francis Hospital in Connecticut for alleged plan mismanagement.