Data & Research April 25, 2017

Most IRA Assets Flow From Employer Plans

A new study by the Center for Retirement Research explores the modern state of the individual retirement account and those who invest in it.
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Even though individual retirement accounts (IRAs) were designed to be tax-preferred alternatives to employer-sponsored retirement plans, most assets in these vehicles are rolling over from 401(k)s, according to a study by the Center for Retirement Research (CRR).

Today, IRAs still dominate private retirement assets. By the end of the third quarter of 2016, $7.8 trillion dollars were invested in these vehicles. The figure far exceeds those invested in defined contribution (DC) and defined benefit (DB) plans, which account for $5.7 trillion and $3.3 trillion respectively.

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The study also surveyed some of the characteristics of the typical IRA account holder. CRR notes that most tend to be white, college educated, and already contributing to a 401(k). The organization concludes that “IRAs – as currently used – have drifted very far from their original intent of providing tax-preferred retirement saving for those without an employer plan. These vehicles currently do little to encourage retirement saving, but rather serve as the landing place for assets originally accumulated in 401(k) plans.”

The main reasons, CRR surmises, are that employees rarely want to leave money with their old employers and moving over assets into a second employer-sponsored retirement plan is often difficult and time consuming. However, several industry leaders are actively pushing to make auto-portability the standard.

Nonetheless, IRAs continue to be a driving force. Although most assets in these plans are flowing from previous employer plans, individuals’ contributions account for about 13% of new IRA assets each year.

According to the Investment Company Institute (ICI), 43 million households or 43% of the total owned IRA accounts. But the industry may soon need to shift notions of these vehicles back to basics. Rather than being the easiest alternative to moving assets to another employer’s plan, these can serve as the default option for those not saving through an employer-sponsored retirement plan. The CRR notes that congressional action could be taken in order to automatically enroll those not saving through an employer into an IRA, with the choice to opt-out. However, political uncertainty especially as it relates to tax reform still persists. But, the CRR notes that even though the course for retirement savings reform seems to be lagging at the federal level, states are moving on to create a framework whereby citizens can be auto-enrolled into a state-run retirement plan if they lack access through an employer.

Access to the full brief “Who Contributes to Individual Retirement Accounts?” can be found at crr.bc.edu.

Compliance April 25, 2017

Advisory Firm Dodges ERISA Suit Against BB&T

In the underlying complaint, the advisory firm was lumped together with the plan sponsor/recordkeeper and accused of permitting fiduciary breaches under ERISA. 
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Often when a retirement plan participant files suit against a plan sponsor, investment manager or recordkeeper, the advisory firm gets dragged in as well.

This was the case in Bowers vs. BB&T, a lawsuit filed initially in 2015 in the U.S. District Court for the Middle District of North Carolina. The case is not to be confused with a similar lawsuit, Smith vs. BB&T,  filed in the same court right around the same time.

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Plaintiffs in the Bowers litigation include participants in the BB&T Corporation 401(k) Savings Plan, and they accuse their employer of “self-dealing and imprudent decisionmaking in the management of its retirement plan.” As the initial and amended complaints lays out, in the opinion of participants, “BB&T does not act in the best interest of its employees and Plan participants. Instead, BB&T treats its 401(k) plan as an opportunity to maximize company profits at the expense of plan participants, by (among other things) charging plan participants excessive fees and then recouping those fees as profits.”

While the advisory firm has now been dismissed from the pool of defendants, the wider case itself will still apparently move forward. Similar to the targets of other “self-dealing suits,” case documents show BB&T is the plan’s sponsor, recordkeeper, custodian, and primary investment manager. Plaintiffs argue the arrangement is rife for conflicts of interest.

With their end-to-end control of plan services, plaintiffs argue that “defendants have loaded the plan with high-cost mutual funds run by BB&T’s wholly-owned subsidiary, Sterling Capital, which is also a participating employer in the plan. Sterling Capital then pays a large portion of the investment management fees it receives back to BB&T, ostensibly for the recordkeeping and custodial services that BB&T provides to the Plan, but in actuality the payments are two to three times greater than the costs BB&T actually incurs to provide those services. The rest is profit.”

Further, BB&T fiduciaries are accused of “mismanagement that … extends beyond their failure to adequately control plan costs. Defendants have also failed to remove poor performing investments from the plan, in breach of their fiduciary duties. For example, the BB&T Large Cap Fund has been a poor performing mutual fund for decades.”

NEXT: Role of the adviser 

The second amended complaint calls outs Cardinal Investment Advisors for its role as consultant and the services it provides to the BB&T compensation committee. According to the complaint, “Cardinal acknowledged its role under the Employee Retirement Income Security Act (ERISA) as a fiduciary to the plan … The Compensation Committee expressly acknowledged and required Cardinal’s role as fiduciary to the plan.”

Case documents show Cardinal provided many of the traditional services to BB&T one would expect. These include: “(i) providing advice and recommendations to the compensation committee regarding investments offered in the Plan; (ii) amending and revising the statement of investment policy for the plan; (iii) monitoring the investment options and the managers of the investment options in the plan for annual reviews, compliance with the statement of investment policy, and adherence to stated style and performance; (iv) the analysis of custodian, manager and investment account search, selection, and transition; (v) preparing reporting of the investment options including the performance of the investments, net of fees; and (vi) conducting plan administrative fee reviews, cost assessments, and fee benchmarking studies.”

Because of its broad advisory role to the plan, essentially all of the accusations of wrongdoing and imprudence leveled against BB&T are also made against Cardinal. For example, here is how the plaintiffs make the accusation that the plan should have been investing in vehicles beyond mutual funds: “Aside from excessive fees compared to other mutual funds that were available to the plan, BB&T defendants, and Cardinal, also failed to adequately investigate (or failed to come to a reasoned decision) offering non-mutual fund alternatives, such as collective trusts and separately managed accounts. Each mutual fund in the plan charged fees greatly in excess of the rates BB&T defendants, and Cardinal, could have obtained for the plan by using these comparable products.”

The advisory firm naturally filed a motion to dismiss, arguing that the “claims against it in the second amended complaint should be dismissed because the complaint contains only conclusory assertions with insufficient factual allegations as against it.” Simply put, the court agreed, as outlined in this document.

“While perhaps the plaintiffs have arguably alleged facts to support the claim that Cardinal had some fiduciary responsibilities, there are no facts alleged indicating that it was a fiduciary with respect to the particular activities at issue, some of which occurred before Cardinal even had a relationship with BB&T,” the decision to dismiss states. “The plaintiffs do little more than use the word ‘defendants’ or add the phrase ‘and Cardinal’ to allegations against other defendants.”

The court concluded “there are no facts alleged that as to the particular breaches of fiduciary duty alleged, Cardinal did any specific thing. While a plaintiff does not have to prove his or her case in the complaint and does not have to offer facts in support of every element he or she will be required to prove at trial, some specific facts tending to indicate a particular defendant is liable are necessary. Here, the plaintiffs have essentially alleged nothing more than that Cardinal gave BB&T general investment advice.”

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