Compliance September 25, 2017

Excessive Fee Suit Filed Against Novitex 401(k) Plan Fiduciaries

A participant says a plan with more than $157 million in assets has the bargaining power to negotiate lower fees for administration and plan investments.
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A participant in the Novitex Enterprise Solutions Retirement Savings Plan has sued plan fiduciaries for allowing unreasonable expenses to be charged to plan participants.

The complaint calls the plan “a significant and large 401(k) plan in terms of assets, with more than $157 million in assets as of December 31, 2015 and more than 10,000 participants.” It argues that a plan of this size has “significant bargaining power and the ability to demand low-cost administrative and investment management services within the marketplace for administration of 401(k) plans and the investment of 401(k) assets.”

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The lawsuit says the fiduciaries breached their duties under the Employee Retirement Income Security Act (ERISA) by failing to fully disclose to participants the expenses and risks of the plan’s investment options; by allowing unreasonable expenses to be charged to participants for administration of the plan; and by selecting and retaining opaque, high-cost, and poor-performing investments instead of other available and more prudent alternative investments.

For the stable value investment option in the plan, the Prudential Guaranteed Income Fund, the lawsuit not only calls into question the fees, but also the crediting rate used for the fund. According to the complaint, the fund guarantees a 1.50% return before the application of a 0.40% “asset charge,” and provided only a net rate of return to 1.35% from January 2017 to June 1, 2017. It says the stable value industry benchmark, the Hueler Analytics Stable Value Pooled Fund Index, has a return of 1.82% from January 2017 to May 31, 2017. “The discrepancy is egregious in light of the Plan Investment Policy Statement, which specifically provides that, with respect to the stable value option, a review of applicable fees and revenue sharing (i.e., the asset charge) shall be a selection criteria,” the complaint says. It compares the Prudential Guaranteed Income Fund to the Vanguard Stable Value Fund, which has a lower expense ratio of 0.35%, and a higher crediting rate of 1.86%.

The participant, individually and on behalf of the plan, seeks to recover and obtain all losses resulting from each breach of fiduciary duty, as well as other equitable or remedial relief for the plan as the court deems appropriate.

NEXT: Specific Allegations

The complaint notes that with the exception of the Vanguard Institutional Index fund, all of the variable investment options are actively managed. And, with the exception of the Vanguard Institutional Index fund (0.04% expense ratio) and the actively-managed Vanguard Inflation-Protected Securities fund (0.10% expense ratio), all are costly, with expense ratios ranging from 0.69% to 1.08%, with a mean of 0.78% and a median of 0.89%.

“Despite the negotiating leverage based on its size, the plan did not even utilize the cheapest share class for most of its investment options,” the lawsuit says.

It also alleges “any revenue sharing paid from the investment options offered by the plan to compensate for administrative, recordkeeping and other services was unreasonable on its face because a retirement plan with the assets of the plan could have easily achieved lower total plan cost by adopting a zero revenue sharing menu of investment options and/or by properly achieving all available savings from revenue sharing by establishing a properly structured and designed plan expense account that credited all revenue sharing to the benefit of the plan and equalized the amount of participant fees (both direct and indirect) paid by participants of the plan.”

The complaint calls out UBS, the plan’s fiduciary investment adviser, saying Novitex and the Benefits Committee breached their fiduciary duty of prudence by retaining and/or permitting UBS to be excessively compensated. According to the complaint, in addition to a $125,000 per annum base fee (which it says is excessive given the size of the plan), UBS also receives “additional compensation from third parties in connection with assets in which clients’ advisory accounts are invested.” UBS may also receive compensation as a result of “intercompany profit and servicing agreements.” The participant says this means “UBS has a vested interest in obtaining more compensation from third parties and related entities, which may run counter to the interests of the plan of choosing the most prudent investment options.”

Likewise, the complaint says the plan’s recordkeeper, Transamerica, was paid excessive recordkeeping and related fees in light of the assets and other characteristics of the plan. It charges Novitex and the Benefits Committee with breaching their fiduciary duties by failing to monitor and ensure that Transamerica was paid reasonable compensation.

Data & Research September 25, 2017

Americans Fear Exhausting Money in Retirement More than Death

A new study by Allianz shows Americans are generally concerned about retirement, but different generations can learn from Boomers who are growing more frugal. 

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More than half (72%) of Baby Boomers say they feel financially prepared for retirement, according to the “New Generations Ahead Study” from Allianz Life. This figure rose from 58% in 2010.

The study also found that only 32% of Boomers say that uncertainty about their financial future makes it difficult to determine when and if they can retire – a drop from 50% in 2010. Moreover, the survey found 50% of Boomers feel it’s impossible to determine retirement expenses, marking a drop from 60% in 2014; and only 36% say they lack the tools needed to crack the retirement puzzle, indicating a decrease from 46% in 2014.

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Allianz attributes this boost in optimism to changing financial habits among Boomers. The firm notes that “A new frugality has taken hold with Baby Boomers that is leading to a stronger sense of financial preparedness and confidence than seen in previous Allianz Life studies. With 64% of boomers noting themselves as ‘savers’ rather than ‘spenders,’ and 61% saying they always know exactly how much money is in their accounts, the formerly free-spending boomers of the ‘Me’ generation have embraced the financial habits of their Depression-era parents – so much so that a full quarter of boomers now describe themselves as ‘penny pinchers.’”

The firm also sheds some light on how financially savvy Boomers prefer to receive advice around retirement saving. Allianz found that Boomers want phone and email communication about one to three times a month with a financial professional who can communicate with them on their terms.

Given these findings, it’s important for plan sponsors and advisers to understand the unique financialchallenges Boomers face including longevityrisk, predicting healthcare costs and developing a sound strategy around SocialSecurity income. The uncertainty behind these financial challenges may be one of the reasons why Allianz found Boomers also prefer guaranteed products over those with risks of loss, and those who are not currently working with a financial professional would be more willing to work with one if the financial professional was able to provide a way for guaranteedlifetime income. 

In fact, Allianz finds that retirement saving has taken priority with 65% of Boomers saying they see it as a basic necessity like food and housing.

“The Generations Ahead Study highlights encouraging news for boomers and proves that with proper focus and engagement, anyone can turn around a poor savings situation and start building for a successful retirement,” said Paul Kelash, vice president of Consumer Insights for Allianz Life. “Whether taking lessons from the past or forging a new path, the key for each generation is to recognize that a solid retirement plan doesn’t happen by chance, but rather with a clear process and defined actions.”

NEXT: Millennials’ Spending Habits a Growing Concern 

Although the Allianz study found that Millennials are generally confident about their financial future, their financial habits sketch a different story. According to the study, 63% of Millennials consider themselves spenders rather than savers, 50% say they spend more on going out than rent or mortgages, and 17% say they spend money as soon as they get it.

Despite these findings, they Millennialsseem overconfident about their long-term finances. More than half (74%) feel prepared for retirement and 76% are confident their income will last a lifetime. Still, there are several ways advisers and plan sponsors can help Millennials get on the right track. For instance, leveragingdigital tools may help improve financial habits as 70% of Millennial respondents already embrace online apps to help manage their money. Sixty-three percent are also comfortable using traditional money management tools such as notebooks and planners, suggesting this cohort is comfortable taking a multi-media approach to financial planning.

Honing in on behavioral finance and psychology can also benefit advisers as many Millennials say they want to learn from their parents’ financial mistakes. More than half (65%) say they are uncomfortable with debt because they saw their parents struggle with it.

Allianz says, “Despite these financial challenges, new savings strategies and a desire to avoid repeating the mistakes their parents made have had a positive effect on Millennials’ retirement readiness.”

In fact, Allianz found the median retirement savings for Millennials was $35,000. However, it was roughly the same for GenerationX respondents, even though they are closer to retirement than Millennials. Allianz highlights that this generation is “lagging behind” when it comes to retirement savings.

Recent Studies have highlighted the unique challenges faced by these people belonging to a group often labeled the “sandwich generation.”

These concerns are especially important considering the study found that across generations, 63% of respondents are more afraid of running out of money in retirement than they are of death.

“Although generations share similar hopes and fears for the future, the fact that they all approach retirement in different ways is testament to the need for more tailored planning that can address both the positives and negatives inherent in each group,” says Paul Kelash, vice president of Consumer Insights for Allianz Life.

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