Compliance October 6, 2010

DoL Urges Unisys Fee Case Reversal

A federal judge in Pennsylvania made a mistake when he threw out a 401(k) excessive fee case against Unisys Corporation and Fidelity Management Trust Company, the Department of Labor (DoL) contends in court papers.
Reported by

In urging the 3rd U.S. Circuit Court of Appeals to overturn a ruling by U.S. District Judge Berle M. Schiller of the U.S. District Court for the Eastern District of Pennsylvania, DoL attorney Elizabeth Hopkins argues that the participants had advanced a strong enough case to survive an initial legal challenge. Hopkins made the comments in a friend of the court brief filed with the appellate court supporting the plaintiffs’ appeal of Schiller’s April 2010 order.

Noting that federal courts only require a lawsuit to inform the defendants about the nature of the legal claims and “plausibly state a claim for which relief is available,” Hopkins argues the plaintiffs met that standard and should be allowed to move forward.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

“The complaint in this case alleges that Plan fiduciaries, who are impressed by (Employee Retirement Income Security Act) ERISA with strict duties of prudence and loyalty, violated their duties by allowing one of the country’s largest 401(k) plans to pay excessive retail-level fees for its investments when it could have obtained the same investments and services for less,” Hopkins writes in the brief. “Fees are an important component of the overall performance of ERISA defined contribution plans and, therefore, ensuring the reasonableness of those fees is a critical component of a prudent fiduciary’s responsibilities.”

Hopkins continues: “(Schiller’s) order dismissing this suit on plausibility grounds not only misconstrues ERISA’s fiduciary duties with regard to plan fees, it also directly undermines ERISA’s expressly stated intent to provide plan participants and beneficiaries ‘ready access to the Federal courts.’ Nothing in the (requirements for federal court lawsuits) supports this result.”

According to Hopkins’ brief, Schiller also misconstrued ERISA section 404(c). “The statutory safe harbor in section 404(c) does not immunize fiduciaries for losses caused by their own imprudence,” Hopkins declares. “… Instead, it ensures that plan fiduciaries retain responsibility – and accountability – for the prudent selection and monitoring of plan investment options in accordance with ERISA’s stringent fiduciary obligations.”

Schiller ruled that Fidelity Management Trust Company and other Fidelity defendants were not functional fiduciaries for the investment selection for the plan, so no claim could be made against them, and that Unisys had met the requisite standard of care in its investment offerings to participants (see Unisys, Fidelity Win Excessive Fee Case Dismissal).

Schiller pointed out that the plan offered participants 70 investment options with varying fees, risks, and potential rewards – including commingled pools, index funds, bond funds, funds representing various parts of the global economy, and a money market fund – and the fees charged by these funds were disclosed to investors who could choose from among the investment options to create a portfolio tailored to meet their investment objectives.

The DoL appellate brief is here.

The Markets October 5, 2010

PANC 2010: Rolling Over

At the PLANADVISER National Conference in Orlando last month, three panelists discussed the retirement plan rollover market, with one saying it’s the perfect place to find “money in motion.”
Reported by

The panelist, Richard Schooley, vice president, Morgan Stanley Smith Barney, was saying that financial advisers gain the most business opportunities when they’re working with people who want to make a change with their savings.   Very often, plan participants nearing retirement would fall into that category.   

And the business opportunities in the rollover market are plentiful, according to Jonathan Murray, senior vice president, investments, The Murray Group.  He said to think of it like a gas station.  The customers might show up to buy gas, but the station owner makes even more money from the convenience store.  The 401(k) plan is like the gas, and rollovers are like the convenience store.  Murray added that millions of Americans have questions about rolling over a 401(k) plan into an IRA, and financial advisers have a great opportunity to help a lot of people.

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

Of course, a financial adviser with fiduciary standing over a plan needs to be more cautious, said Don Holt, vice president, Payden Retirement Services Group.  He said full disclosure is the key.  “If I’m charging 50 basis points as plan consultant, and then I’m charging 65 basis points for an IRA rollover…as long as you’re willing to put their interests up front,” there are ways to make it work, he said.   

An adviser in the audience chimed in at the point, to say that her firm assigns fiduciary liability to its advisers.  The FAs are not allowed to solicit participants for rollovers; however, if a participant approaches them, then they are allowed to broach the idea of a rollover.

How can an adviser have participants approach them when it’s time to start thinking about rolling over?  Schooley says it’s all about generating “good will.”  His business model is very labor intensive; they’re on-site once a month getting to know the participants. They send participants birthday cards and have customized newsletters for each client.  By the time the participant is nearing retirement, Schooley says they see his firm as their personal financial adviser. “They’ll approach me and say, ‘I guess I’m supposed to roll this over to you now?’ And I say we can help you with that.”  He lets them know his wirehouse charges more for a rollover, but the participant is just grateful that the adviser is there for them.   

Holt pointed out that as more legislation is introduced, “we all need to be more comfortable with the idea of giving advice.”  He said it will add to more opportunities.Schooley added that conducting participant education activities, such as an “Over-50 Seminar,” would be an appropriate platform to introduce the idea of an IRA rollover. Another option is an in-service withdrawal.   

At the mention of in-service withdrawals, all the panelists started to say what a good idea they are. The in-service withdrawal allows participants aged 59 ½ to rollover their 401(k) into an IRA, penalty-free. This allows them to have more flexibility and control over their investment choices. However, not all plans come with this option.   

The panelists agreed that most people want a financial adviser to take a “holistic approach” to their finances; covering things like college planning, retirement planning, rollovers, and estate planning.  It’s up to each adviser to get the conversation going.   

 

 

«