In its reply in support of its motion to intervene in
the case against Northrop Grumman, the Department of Labor (DOL) noted that its
Employee Benefits Security Administration (EBSA) investigation and the
litigation are substantially similar since they both involve questions related
to the administration of the plan, including an examination of expenses paid by
the plan and whether those expenses are reasonable. “The documents produced in
this litigation regarding fees and expenses paid by the Plan, and whether such
fees and expenses are reasonable, are clearly relevant to EBSA’s investigation
into the reasonableness of fees and expenses paid by the Plan,” the court
document says.
The EBSA said it first attempted to obtain records from
plaintiffs’ counsel, Schlichter, Bogard & Denton, in 2011, but Northrop
encouraged the U.S. District Court for the Central District of California to
deny the request, saying the EBSA should obtain the documents directly from the
company. The EBSA claimed records produced by the company in the three years
since were deficient, so it issued a subpoena to the Schlichter law firm.
The Schlichter subpoena covers a broader time period than
the EBSA investigation. The EBSA said many documents produced for the period
beyond the investigative period are relevant to its investigation because they
show the various expense trends which bear on their reasonableness, which might
assist it in determining whether any person is violating or has violated any
provision of the Employee Retirement Income Security Act (ERISA).
The court modified a protective order granted to Northrop
Grumman to permit Schlichter’s firm to produce to the DOL all documents which
have been created, obtained or produced by Schlichter which reflect
non-litigation events occurring after January 1, 2006, relating to the Northrop
Grumman Savings Plan.
The
case was originally filed in September
2006. Plaintiffs claimed the defendants violated their ERISA fiduciary
responsibilities by including in their retirement plans investment options for
which plaintiffs claim the fees were too high.
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Open Architecture vs. All-Proprietary Target-Date Funds
The
diversity of investment options available for today’s 401(k) plans can be
overwhelming, so it is important for employers to understand the nuts and bolts
of the investments they’re choosing.
Many plan sponsors believe that offering a lineup of target-date
funds (TDFs) is imperative, particularly for participants who are not utilizing
personalized advice but still want and need a professionally managed solution
for their assets.
But TDF offerings are by no means all alike. TDFs are typically
offered by asset managers, banks, trust companies, and insurance companies in
the form of mutual funds or collective trusts. Mutual funds or collective
trusts may utilize either proprietary-only or open architecture investment
strategies. Most TDFs rely on proprietary-only strategies. This means that
asset allocation, manager selection, and security selection are all provided by
the same firm. As a result, these funds are filled exclusively with proprietary
investment choices.
Open-architecture funds are distinctly different. Depending
upon whether the TDF is a “fund of funds” or a collective trust, the fund may
search for and select non-proprietary funds or third-party managers to act as
sub-advisers to the fund. Plan sponsors would do well to consider the key
differences between proprietary-only and open-architecture target date funds. When
it comes to flexibility, cost, aligned interests and track record, the benefits
of open-architecture target date solutions are hard to ignore.
Flexibility
Since open-architecture TDFs are not wedded to a single
firm’s underlying strategies, they can include a mix of different investing
styles and seek out leading managers with the goal of delivering increased
levels of diversification.
Frankly, it is unreasonable to expect any single firm to
offer the best funds with demonstrated track records in every asset category,
because every investment firm has its strengths and weaknesses. Open-architecture
funds have the freedom to bring top funds or sub-advisers together under one
umbrella, regardless of their “house brand” affiliation. This means an open-architecture
fund could include large cap, multi-sector fixed income, emerging markets and small
cap strategies, all from different managers that are considered among the best in
class in their respective strategies, and better diversify the TDF relative to
proprietary-only target date funds.
The
use of third party sub-advisers means open-architecture TDFs are less
vulnerable to groupthink. With proprietary-only strategies, all of the fund
managers are typically relying on the same research, analysts, and economic
outlook to form their point of view, which can be risky. TDFs that work with a
number of firms help to mitigate this risk for plan participants because these
funds have the benefit of a broad range of research, processes and schools of
thought about the markets.
Costs
Though it might seem counterintuitive, some open-architecture
funds, particularly collective trust funds, have an additional ability to
control costs since they have the flexibility not only to search for a wide
variety of strategies, but also to negotiate on price in a competitive search
process.
Proprietary-only strategies may be restricted to their own
underlying strategies, and by extension, the fees or expenses associated with
those strategies. This can drive up costs, particularly for smaller or more
specialized asset managers that lack the bandwidth to support a TDF for the
defined contribution plan market. These costs can translate into higher
operating expenses being passed on to plan sponsors and participants.
In an open-architecture lineup, the fund sponsor typically has
negotiated pricing with its sub-advisers, and these savings can be passed on to
the participants. With open-architecture funds, plan sponsors and their
participants get access to investment managers selected based on portfolio fit,
performance and pricing criteria; and specialist sub-advisers get access to the
very large defined contribution market that may otherwise be out of reach. It’s
a win for everyone.
Aligned
Interests
Most plan fiduciaries would never consider constructing an
all-proprietary core investment menu as part of their plan. Today, a typical
mid-size defined contribution plan may offer 10 to 12 mutual funds from several
providers. Essentially, that’s open-architecture, and it has been adopted
because plan sponsors recognize that a diversified offering can help better
serve participants.
Open-architecture TDFs are constructed using a similar
approach. Unlike funds that are limited to using only proprietary products,
open-architecture TDFs can select from an unconstrained universe of strategies,
and make adjustments as warranted. This helps mitigate the potential for
conflicts of interest to factor into decision-making, and provides better
diversification.
Track Record
Open-architecture target date funds can define the criteria
for the type of third party fund or sub-adviser they want, and therefore focus
on identifying managers and funds with demonstrated expertise. Proprietary TDFs
are limited to offering what’s on their shelf, so while they may be able to
offer a product to fill a particular slot, it can be harder for them to
demonstrate their process for selecting the best funds for plan participants.
The Case for Open-Architecture
The
idea of a one-stop, proprietary TDF line up may appeal to some, but the reality
is that an open-architecture model offers a level of flexibility and transparency
that cannot be dismissed. Plan sponsors need to apply the same level of rigor,
due diligence and fiduciary process to their target date family selection as
they do when putting together their retirement plan’s core offerings.
Asking the Right
Questions
As part of the ongoing evaluation of the plan’s investment
offerings, plan sponsors can start a dialogue with TDF providers by asking the
following:
How many different
investment managers are represented in the underlying funds?
If the underlying funds
are all from one firm, do they use centralized research and economic forecasting?
Are the underlying funds
all active, all passive, or both?
How much overlap is there
among holdings in the underlying funds?
What is the TDF manager’s
process for selecting and removing the underlying funds?
Are the underlying funds
owned by mainly institutional or retail investors?
Are the lowest-cost share
classes being used for each underlying fund?
What is the portfolio
management tenure of the underlying strategies?
Has the TDF provider ever
replaced an underlying strategy?
How well have the
underlying strategies performed?
NOTE: This feature is
to provide general information only, does not constitute legal advice, and
cannot be used or substituted for legal or tax advice. Any opinions of the
author(s) do not necessarily reflect the stance of Asset International or its
affiliates.
