Compliance January 3, 2017

Fee Litigation Targets Multiple Retirement Plans at Health System

Plaintiffs suggest their employer should have allowed a single recordkeeper to service its traditional DC plan and its 403(b)—and that it paid excessive fees by paying for distinct administrative services for each. 
Reported by

A new class action complaint seeks damages on behalf of nearly 20,000 participants, who argue their nearly $1 billion in combined plan assets should have earned them a better deal on investments and administration.  

The latest example of retirement industry fee litigation was filed just before the New Year in the U.S. District Court for the District of Minnesota: Morin et al vs. Essentia Health.  

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

The case contains many of the elements that have become wearingly familiar to PLANADVISER readers; participants claim their employer failed to negotiate fair fees from a variety of service providers during the class period, and that excessive fees paid by participants were effectively used to subsidize the employer’s own costs in offering/running the plans. But it also is distinct because of the history of the two retirement plans described in detail in the text of the complaint, including a 403(b) plan that has some important distinctions from a typical 401(k).

At a high level, participants argue their employer failed to use the combined bargaining power of its two retirement plans—one a traditional defined contribution plan known simply as the Retirement Plan and the other a distinct 403(b) plan. The Retirement Plan was established and effective on December 22, 1965. It has been restated and amended numerous times since. It was recently restated and amended, effective January 1, 2012, to identify Essentia Health as the sponsor and replace Essentia’s subsidiary in that role. The 403(b) plan was first established and effective on January 1, 2009, and Essentia has been identified as the 403(b) plan sponsor since its inception.

According to the text of the complaint, the Retirement Plan had 16,848 participants with balances and held approximately $982 million in assets at the end of 2014. The 403(b) Plan had 2,836 participants with balances and held approximately $103 million in assets. The plans combined administratively in 2012, participants claim, “contemporaneously with the restatement and amendment of the Retirement Plan.”

Plaintiffs argue the size of a defined contribution plan, both by number of participants with balances and total assets, should directly determine the pricing it can obtain for administrative services and investment management. “By combining administratively, the plans have had the ability to operate in the market as a 20,000-participant plan with $1 billion in assets,” plaintiffs suggest.

The claims for damages look to the period prior to the administrative merger of the plans. According to plaintiffs, prior to January 1, 2012, defendants imprudently kept the plans’ records and operations separately. Defendants used BMO Harris as the recordkeeper for the Retirement Plan and Lincoln National Corporation as the recordkeeper for the 403(b) plan. The size of the plans stayed roughly the same through the end of 2011.

“Though the Plans were operated as two separate entities, this should not have diminished their combined bargaining power, as defendants had control of both plans,” plaintiffs suggest. “A prudent fiduciary would have offered service providers the ability to service both plans as a way to attract their business and ultimately demand lower rates.”

NEXT: Details from the complaint 

The complaint argues that, had an investigation and analysis of the market for recordkeeping services been conducted in the 2009 to 2011 timeframe, the plans “should have been able to procure comprehensive recordkeeping services for between $60 and $80 per participant.”

“In 2009, defendants caused the Retirement Plan to pay BMO Harris a grossly excessive $127 per participant, more than 50% above a reasonable amount,” plaintiffs suggest. “Moreover, the Retirement Plan’s excess was exclusive of revenue sharing. The Retirement Plan’s Form 5500s during these years stated that BMO Harris was receiving additional indirect compensation (a/k/a revenue sharing), but did not disclose the amount or formula.”

For the 403(b) plan, defendants’ compensation arrangement with Lincoln from 2009 to 2011 was based entirely on Lincoln’s receipt of revenue sharing payments from the 403(b) plan’s investments, according to the complaint. Plaintiffs “do not know the amount received by Lincoln, because Essentia did not disclose the amount or formula, nor can the amount be discerned from the plan’s investments, given that the 403(b) Plan’s 5500s during this period did not disclose the share class of its mutual fund investments.”

The complaint continues: “Based on Defendants’ disregard for BMO Harris’ excessive compensation (and defendants’ other failures described herein), it is reasonable to infer the revenue sharing payments collected and retained by Lincoln exceeded the reasonable value of Lincoln’s recordkeeping services.”

“The problem worsened in the 2010 plan year,” plaintiffs suggest. “Defendants permitted BMO Harris to collect $142 per participant in direct compensation, in addition to the revenue sharing BMO Harris was receiving. The amount of revenue sharing received by BMO Harris in 2010 is unknown, because Essentia again reported extra indirect compensation to BMO Harris on its Form 5500 but not the amount or formula. The 403(b) plan’s payments to Lincoln also remained a black box … Essentia disclosed only that Lincoln’s compensation was paid almost entirely through revenue sharing, which Essentia refused to quantify. Reasonable recordkeeping services remained available, for plans the same size as the Plans, for between $60 and $80 per participant—and trending downward.”

Similar patterns are alleged for the years leading up the 2012 plan reforms, and participants further call into question the quality of the fiduciary process used to select current service providers. While fees have ostensibly come down in the plans, participants suggest they are still not being fully informed of the all-in costs once revenue-sharing is considered. 

The full text of the complaint is available here. 

Compliance December 30, 2016

SEC Offers Guidance on DOL Fiduciary Rule Compliance

Since the DOL conflict of interest rule’s publication, mutual fund providers and their adviser-intermediaries have also been asking the SEC extensive questions about sales loads, fee schedules, etc. 
Reported by

The Securities and Exchange Commission (SEC) will not be in charge of applying the stricter conflict of interest standards being introduced for retirement plan advisers and the investment providers supplying them with products to sell, but many of its own rules and regulations will interact intimately with the Department of Labor rulemaking.

According to the SEC’s latest guidance, since the DOL rule’s proposition and finalization, representatives of mutual funds have been considering a variety of issues related to its implementation, including “contemplating certain changes to fund fee structures that would, in certain instances, level the compensation provided to a financial intermediary for the sale of fund shares by that intermediary and facilitate intermediaries’ compliance with the rule.”

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

SEC notes that some funds are considering streamlined sales load structures to simplify costs for investors and to help address operational and compliance challenges that can exist for intermediaries that sell shares of multiple funds. Thus, its guidance is focused on disclosure issues and certain procedural requirements with offering variations in fund sales loads and new fund share classes.

For example, the guidance reminds readers that, concerning variations in sales loads, a fund may sell shares at prices that reflect scheduled variations in, or elimination of, sales loads, as long as each sales load variation is disclosed in the prospectus.

“Under the Investment Company Act of 1940 and item 12(a)(2) of Form N-1A require that each variation be applied uniformly to particular classes of investors or transactions and disclosed in the prospectus with specificity,” the guidance explains. “We understand that funds are considering new variations to sales loads that would apply uniformly to investors that purchase fund shares through a single intermediary (or category of multiple intermediaries). In these circumstances, item 12(a)(2) of Form N-1A requires that the prospectus: (1) briefly describe the arrangements that result in breakpoints in, or elimination of, sales loads; (2) identify each class of individuals or transactions to which the arrangements apply; and (3) state each different breakpoint as a percentage of both the offering price and net amount invested.”

NEXT: More from the SEC guidance 

According to SEC, under this approach, investors who purchase through a designated intermediary would be a “class” under item 12(a)(2). Therefore, the disclosure should specifically identify each intermediary whose investors receive a sales load variation.

“This information must be presented in a clear, concise, and understandable manner, and should include tables, schedules, and charts where doing so would facilitate understanding,” the guidance states. “In addition, the narrative explanation to the fund fee table must alert investors to the existence of sales load discounts or waivers and provide a cross-reference to the section and page of the prospectus and statement of additional information that describes these arrangements.”

SEC acknowledges that some fund firms are concerned that if a provider creates multiple scheduled variations, it could lead to lengthy prospectus disclosure that may be difficult for an investor to navigate and comprehend. “Given the Commission and staff focus on improving disclosure, we would not object if lengthy sales load variation disclosure for multiple intermediaries is included in an appendix to the statutory prospectus,” SEC says.

The guidance lays out a number of requirements fund firms and intermediaries must follow in order to use an appendix under this approach. These requirements may seem complicated but they are all constellated around doing the right thing, transparently, for investors.

Also covered are a series of questions firms are asking about the creation and distribution of new share classes. According to the SEC, many funds are considering offering new share classes that differ with respect to sales loads, transaction charges, and certain ongoing expenses.

“As with the scheduled variation procedures … adding a new class to an existing fund requires a filing under rule 485(a). When reviewing a rule 485(a) filing that adds a new share class, we focus on the disclosure of fund fees, performance, and distribution arrangements. If only certain disclosures about the fund are changing, such as to describe the new share class, we encourage funds to seek selective review of the filing as described below. Also, because share class specific information is often substantially identical across Funds within the same fund complex, funds should consider whether it is appropriate to request Template Filing Relief as described below.

The full guidance is available for download here. 

«