Compliance November 21, 2013

DOL Says Stock Purchase Violated ERISA

The Department of Labor (DOL) has filed a lawsuit in U.S. district court to recover plan assets from the fiduciaries of Omni Resources Inc., a Milwaukee-based information technology company.
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The suit, Perez v. Mueller et al (civil action number: 2:13-cv-01302), alleges that the fiduciaries of the Omni Resources Employee Stock Ownership Plan authorized the sale of the company’s stock to the plan for $13.7 million, which reportedly far exceeded its fair market value. The sale resulted in personal financial gain to the company owner, Veronica Mueller, who was also a fiduciary to the plan.

An investigation by the Chicago Regional Office of the DOL’s Employee Benefits Security Administration (EBSA) examined a December 2008 employee stock ownership plan (ESOP) stock purchase. The suit names Mueller, who owned 40% of Omni Resources’ stock, and husband Roger Mueller, who founded the company in 1984. The Muellers were the only members of Omni’s board of directors and were also the plan trustees at the time of the transaction. The remaining 60% of the company’s stock was held in a trust for each of their three children. The trusts are also named defendants in the lawsuit because of the stock sold by each.

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The Milwaukee-based Alpha Investment Consulting Group, which executed the stock purchase agreement as a special fiduciary to the ESOP, has also been named as a defendant in the suit for failing to protect the interests of the plan. The suit seeks to require the fiduciaries to restore all losses suffered by the ESOP, and to require the defendants to restore all profits and financial benefits received by them.

The EBSA investigation found that as a result of the design of the transactions and the fiduciary breaches of the Muellers and Alpha Investment Consulting Group, the stock purchases were not for the primary benefit of participants and did not promote employee ownership of Omni Resources. As a result, the DOL concluded that the Muellers and Alpha Investment Consulting Group were responsible and liable for violations of the Employee Retirement Income Security Act (ERISA).

The lawsuit also seeks to remove the Muellers and Alpha Investment Consulting Group as fiduciaries and service providers of the ESOP, as well as permanently barring them from serving as fiduciaries or service providers to ERISA-covered plans in the future.

At the time of the 2008 stock sale, Omni Resources employed approximately 212 information technology consultants in the Milwaukee area and elsewhere. As of December 31, 2012, the plan had 83 active and 113 total participants and assets of $1,761,490.

Data & Research November 21, 2013

Consultants Find Success as OCIOs

Financial services consultants expect 18.5% of assets under management in 2016 will come from outsourced chief investment officer (OCIO) engagements, up from 12% in 2012.
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Those findings come out of a research report from Cerulli Associates, a Boston-based research and analytics firm serving the retirement planning market. In “The Evolving Investment Consulting Industry and Business Model: Opportunities for Institutional Asset Managers,” researchers provide insights on how financial consultants can generate business as more institutions look to outsource investment activity.

Consultants surveyed for the report consistently stated their OCIO business increased significantly in 2013, and that they are anticipating growing interest from institutional clients in particular.

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“Over the past decade, institutional investors have been seeking more proactive advice and ceding portfolio decisionmaking as investment options have grown increasingly complex and markets have become more volatile,” Michele Guiditta, an associate director at Cerulli, says.

Among other topics, the report also analyzes the top business challenges faced by investment consultants. Increased competition due to mergers and acquisitions among investment consulting firms was considered the top threat to consultants, with 90% of those surveyed calling merger activity either a “major” or “moderate” threat to their bottom line.

The report finds industry consolidation has been driven predominantly by consulting firms’ desire to grow business and revenue. Those surveyed said mergers have offered firms a quick way to expand and diversify client bases, grow assets and enhance service offerings.

For those boutique and midsized firms choosing to remain independent, the report finds many instead choose to specialize in a particular client segment or service offering.

Looking more widely at the institutional financial planning market, Cerulli’s report suggests investment consultants maintain a high level of influence. In fact, asset managers surveyed for the report said consultant-intermediated business accounts for slightly less than 60% of total asset flows, with the remainder coming mostly from direct sales.

Further segmentation of the data by firm size shows consultant-generated business was greater for smaller firms—those with $10 billion or less under management—accounting for 75% of small firms’ asset flows. For those firms with $50 billion or more under management, the report shows 48% of assets flows were consultant-intermediated.

Sample findings from the report, along with the table of contents, is available here.

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