The
Pension Protection Act (PPA) provided big drivers to improving defined
contribution (DC) plan participant outcomes, Brian A. Catanella, institutional
consultant and senior retirement plan consultant with UBS Institutional
Consulting Group, told attendees at the 2016 PLANADVISER National Conference in
Orlando.
Automatic
enrollment and automatic deferral escalation increased participation and
savings rates, and qualified default investment alternative (QDIA) rules
shifted employees to more age- and risk-appropriate investments.
But,
plan sponsors are eager for advisers who can look at their plans and help them
make these plans more efficient and effective, he said. They want specialists. “They
have a fear of litigation, and they want help managing their fiduciary
responsibilities,” Catanella said. “In addition, they want to keep costs down,
and need education about how they are paying plan fees.” He added that
revenue-sharing is not always a bad thing if it provides enough to pay a large part
of plan fees.
As
far as plan design, convincing plan sponsors to implement auto-escalation is a
delicate conversation, according to Catanella. But he says, using data,
advisers can make a good case to plan sponsors. “Provide projections of the
improvement in participants’ savings and retirement readiness,” he suggested. “Also, point out the costs of employees not being able to retire.”
For
plan sponsors concerned about the costs of auto-escalation, one thing to
consider is stretching the match. Participants save more and the employer match
costs remain the same.
Catanella
also said encouraging plan sponsors to do a re-enrollment of all eligible
employees is important. Advisers can point out that it could increase
participation of non-highly compensated participants, and may help with
nondiscrimination testing.
He
said getting plan sponsors to measure retirement readiness of employees and
providing a savings gap analysis to employees can also drive plan design
decisions.
According
to Catanella, advisers should encourage plan sponsors to offer overall
financial wellness solutions to employees. “It is especially good to help low
earners,” he said. “There are lots of vendors that can help with this.”
Finally, Catanella
suggested introducing plan sponsors to certain technology, especially to get younger
employees more engaged. Providers have been innovative with smartphone
applications. “It would be good to find an app that shows all of a participant’s
financial components at once,” he said.
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A new proposed class action lawsuit suggests two providers
were less than forthcoming about the real breakdown of advisory fees and underlying
service arrangements.
Plaintiff Lisa Patrico has filed a proposed class action suit on behalf of the Nestle 401(k) Savings Plan “and all
other similarly situated qualified retirement plans,” under Sections 502(a)(2)
and 502(a)(3) of the Employee Retirement Income Security Act (ERISA), targeting
Voya Financial, Inc.
Other named defendants include Voya Institutional Plan
Services, LLC; Voya Investment Management, LLC; and Voya Retirement Advisors, LLC.
According to the broadly reaching complaint, the defendants provide services in connection
with the administration of the Nestle 401(k) program and many others.
The plaintiff lays out her argument as follows: “ERISA’s
prohibited transaction rules prevent a plan fiduciary, which includes the
investment adviser, from causing the plan to engage in various transactions
with ‘parties in interest’ which also include the investment adviser—the
so-called transactional prohibitions. The prohibited transaction rules also
prevent the investment adviser, generally, from causing the plan to engage in a
transaction that would generate additional fees for the fiduciary investment
adviser—the so-called self-dealing prohibitions.
“As a result of these prohibitions and in the absence of any
applicable exemption, a financial institution such as Voya—which provides,
trust, recordkeeping, brokerage and other services to qualified retirement plans,
as well as investment funds—could not provide investment advice to
participants. Voya could not do so out of concern that advising participants to
invest in Voya’s own funds would be a prohibited transaction in violation of
ERISA § 406.”
According to the compliant, one common and obvious solution
to this problem is to have the investment advice provided by a registered
investment adviser (RIA) that is independent of and unrelated to the financial
institutions whose funds were included as investment choices in the plan.
“This would ensure that the fund provider did not have a
financial stake in the outcome of the advice,” the complaint suggests. In this
case, according to the complaint, the independent RIA Financial Engines
Advisors LLC (FE) “claims to fulfill that role, and FE has become the
preeminent purportedly independent investment advice provider to 401(k) plan
participants.”
The complaint goes on to suggest that Voya “determined to
make available investment advice services to the participants of its customers’
plans. If, however, Voya were to allow such services to be provided through an independent
and unrelated investment adviser, Voya would lose out on all the associated
fees it could charge to participants.” Accordingly, in breach of duty, the
plaintiff alleges Voya “devised a strategy that would satisfy the need for a
supposedly independent investment adviser while preserving Voya’s ability to
collect fees for the program: Voya offers the advice program through Voya
Retirement Advisors LLC and charges a fee for the service, but subcontracts
with Financial Engines to actually provide the investment advice.”
NEXT: Breaking down
the allegations
According to disclosures made to Nestle employees and employees
of other employers whose 401(k) plans are administered by Voya, Voya Retirement
Advisors charges each participant 50 basis points for the first $100,000 of the
individual’s account managed by Voya Retirement Advisors, 40 basis for the next
$150,000, and 25 basis points for amounts in excess of $250,000.
“As it turns out, Voya Retirement Advisors does not actually
provide any material services in connection with the advice provided to
participants,” the complaint alleges. “Instead, virtually all of the services in
connection with the advice program are provided by Financial Engines. To be
sure, Voya undertakes to make it appear that Voya Investment Advisors is
materially involved in the process. The Nestle Savings Plan brochure announcing
the advice program, which ... on information and belief was drafted at
least in material part by Voya, states that the program is ‘powered by
Financial Engines,’ but the associated footnote states: ‘Advisory Services
provided by ING Investment Advisors, L.L.C. for which Financial Engines
Advisors, L.L.C. acts as sub advisor.’”
The same footnote appears in Nestle Savings Plan
participants’ quarterly statements that are “signed” by ING (now Voya)
Investment Advisors LLC, according to the complaint.
The complaint continues: “Voya provides no material services
in connection with the advice program, and the only reason for structuring the
advice service as being provided by Voya with sub advisory services by
Financial Engines is to allow Voya to collect a fee to which it is not entitled
… There are alternative ways to view the true nature of this arrangement, all
of which run afoul of ERISA’s fiduciary and prohibited transaction rules.”
From one perspective, according to the plaintiff, Voya has “interposed
itself between the participants and Financial Engines and charged a fee simply,
and unreasonably, to allow participants access to an advice program that is
performed entirely or nearly entirely by Financial Engines. Voya pays Financial
Engines only a portion of the fee being charged to participants, keeping the other
substantial portion for itself … From
another perspective, Financial Engines, the true service provider, is charging
the fees detailed in paragraph 10 above. Financial Engines then pays Voya a
percentage of that fee. This arrangement violates ERISA § 406(b)(3), which
prohibits a plan fiduciary from receiving any consideration for his own
personal account from any party dealing with such plan in connection with a
transaction involving the assets of the plan.”
Regarding the allegations, a Voya spokesperson shared this statement with PLANADVISER: “Voya denies any wrongdoing and intends to vigorously defend the litigation. As one of the largest providers of employer-sponsored retirement plans, Voya is committed to providing clear and comprehensive fee and expense information to our clients and their plan participants. We support transparency and candid communications about plan features and costs so that our clients can make informed decisions on choosing the plan solutions and services that offer them the best value. We value our clients and the trust they place in us. Voya Financial is dedicated to helping Americans plan, invest and protect their savings so they can retire better.”