The Markets June 28, 2017

More Investors Prefer Risk Protection Over Portfolio Growth

Even while the industry has placed attention to product development and growth, investors continue to choose security.
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U.S. investors are heavily interested in risk reduction and protection rather than aggressive portfolio growth, according to the latest research from Cerulli Associates.

The newest report, “U.S. Retail Investor Products and Platforms 2017: Retooling for the Modern Investor,” finds 77% of respondents would prefer the safer route of protecting portfolios from major losses, even if that meant periods of underperforming in the market.

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“After discussing investors’ portfolios with platform providers and advisers, there is a consistent fear of looming client defections resulting from performance that lags a benchmark, or index,” says Scott Smith, director at Cerulli. 

Smith states how real-life experiences of these situations rarely occur, and remain outliers rather than consistent incidents. Instead, he noted the industry’s significant emphasis towards product development and implementation on growth during an extended bull market run, rather than just sole protection.

In fact, Cerulli found that as of year-end 2016, the retail direct channel collected $5.9 trillion in investor assets, and is projected to exceed $7 trillion in 2019. As firms advance from brokerage platforms to wealth management providers, the research firm believes an increase of retail direct segment will take over traditional adviser segments.

Still, Cerulli research shows 80% of investors younger than 40 prefer portfolio protection. Specifically, the study reports younger investors are the ones who remain concerned towards market risk, even if they are aware of challenges with increasing their asset base. It comes as a surprise, as many anticipate this age bracket as easily disposed to accepting portfolio risk, Smith says. In this case, he explains the role providers assume when optimizing an investor’s portfolio, including considering and recognizing an investor’s current goals and concerns.

The study mentioned how retirement goals are better accessible now, due to prevalent implementation of target-date solutions as default investment options in retirement plans. However, this adoption has had little effect on tackling common behaviors undermining investor outcomes.

Information about how to purchase the report can be found here. 

Compliance June 28, 2017

401(k) Self-Dealing Suit Filed Against Waddell & Reed

The lawsuit says Waddell & Reed forced its own 401(k) plan participants to choose among an investment lineup almost exclusively made up of funds managed by the company or its affiliates.
Reported by

Stacy Schapker, acting individually and on behalf of the Waddell & Reed Financial Inc. Section 401(k) and Thrift Plan and all participants in the 401(k) plan from June 23, 2011, through the present, has filed a lawsuit alleging breach of fiduciary duty and prohibited transactions under the Employee Retirement Income Security Act (ERISA) against Waddell & Reed Financial Inc. (“WR FINANCIAL”), which serves as the 401(k) plan’s administrator and one of its employer sponsors, as well as other defendants.

The complaint alleges that, instead of acting for the exclusive benefit of the 401(k) plan and its participants and beneficiaries, the defendants acted for the benefit of WR FINANCIAL and its affiliates, forcing the plan nearly exclusively into investments managed by WR FINANCIAL or an affiliated entity, which charged excessive fees that benefited WR FINANCIAL or its affiliated entities and which performed worse than comparable available options. The lawsuit says the defendants could have chosen nonproprietary, less costly, better-performing investment options for the plan.

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The defendants are accused of offering as investment options in the plan whatever investment products were part of the lineup of Waddell & Reed and Ivy Funds investment products then on the market—i.e., funds established and managed by WR FINANCIAL and its affiliates. According to the complaint, “the only criteria (or virtually the only criteria) used by Defendants when determining what investment options to make available to the 401(k) Plan participants was whether the investment product was part of the then-available line-up of Waddell & Reed and Ivy Funds investment products established and managed by the 401(k) Plan’s own Administrator, WR FINANCIAL, or its affiliates.”

In this way, the lawsuit claims, the defendants breached their fiduciary duties and engaged in prohibited transactions.

The complaint adds that, in a number of cases and during a substantial portion of the class period, the plan’s investment menu was duplicative in content but not cost—i.e., the same investment product with the same holdings cost more when branded as Waddell & Reed than as Ivy. In the complaint, Schapker also claimed that plan fiduciaries violated their duties under ERISA by failing to offer plan participants investment options that were operated and managed by someone other than WR FINANCIAL or its affiliates and that cost less and performed better.

Additionally, she said fiduciaries failed in their duties by selecting as the plan’s default investment option an investment product that WR FINANCIAL or one of its affiliates operated and managed, and by failing to concentrate assets so as to qualify for investment funds that had lower fees and leverage plan assets to drive down fees.

The lawsuit seeks losses that the 401(k) plan has sustained and the disgorgement of all unlawful fees, expenses and profits the defendants have taken, as well as any further equitable or remedial relief  appropriate under ERISA.

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