John Hancock Latest to Face DC Plan ERISA Self-Dealing Lawsuit

The self-dealing lawsuit suggests the firm failed to monitor or control the plan’s administrative expenses, allegedly costing the plan millions of dollars in excessive administrative fees.

Participants in John Hancock Life Insurance Company’s defined contribution (DC) plan have filed a new Employee Retirement Income Security Act (ERISA) fiduciary breach lawsuit against their employer in the U.S. District Court for the District of Massachusetts.

The proposed class action suggests that John Hancock breached its fiduciary duties “by applying an imprudent and inappropriate preference for John Hancock products within the plan, despite their poor performance, high costs and lack of traction among fiduciaries of similarly-sized plans.”

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In addition, the self-dealing lawsuit suggests the firm failed to monitor or control the plan’s administrative expenses, allegedly costing the plan millions of dollars in excessive administrative fees over the course of the class period.

Similar to other ERISA fiduciary breach lawsuits filed against other retirement plan service providers and investment managers, the complaint begins with generalized argumentation to the effect that financial service companies like John Hancock face a high potential for imprudent and disloyal conduct while operating their own retirement plans. The plaintiff suggests that the plan’s fiduciaries are in a position to benefit the company through the plan by, for example, using proprietary investment products that a non-conflicted and objective fiduciary would not choose.

“Defendant has not acted in the best interest of the plan and its participants,” the complaint states. “Instead, defendant used the plan—one of the largest 401(k) plans in the country—to promote John Hancock’s proprietary financial products and earn profits for John Hancock. Throughout the class period, defendant has offered only John Hancock investment products within the plan. Defendant failed to objectively evaluate the plan’s options in an unbiased manner or consider whether participants would be better served by other investment alternatives in the marketplace.”

The plaintiff suggests this has resulted in “tens of millions of dollars in lost investment returns” for the plan and its participants “since the start of the class period in 2014.” At the same time, the plaintiff alleges, John Hancock “failed to prudently and loyally monitor the plan’s administrative expenses, and instead allowed the plan to pay over three-times what a prudent and loyal fiduciary would have paid for such services.” The plaintiff says these excessive administrative payments, allegedly made in the form of revenue sharing payments coming directly from the investment fees charged to the plan for investing in John Hancock mutual funds, resulted in millions of dollars in additional losses to the plan and its participants during the class period.

This is far from the first self-dealing lawsuit to be filed in recent years against an investment manager or retirement plan recordkeeper under ERISA. Results have so far been mixed in such cases. Back in October 2019, a federal district court judge granted Morgan Stanley’s motion to dismiss an ERISA self-dealing lawsuit accusing it of various fiduciary breaches. Participants in Morgan Stanley’s 401(k) plan filed the lawsuit in 2016 on behalf of approximately 60,000 current and former plan participants, alleging the plan included investment options with excessive fees and used Morgan Stanley proprietary funds rather than other funds that would have been better and cheaper for participants. On the other hand, a different district court early last year issued a mixed ruling in a self-dealing lawsuit filed against Charles Schwab—permitting some claims to proceed while denying others.

In this new case, the plaintiff says the plan’s use of John Hancock target-risk funds “offers a good example of defendant’s imprudent and self-interested process for managing the plan’s investments.”

“The plan’s menu included all five of John Hancock’s target-risk funds (Multimanager Lifestyle Balanced, Conservative, Moderate, Growth and Aggressive) throughout the class period, and for most of that period, the John Hancock Multimanager Lifestyle Balanced Fund was the default fund for participants who did not elect an investment,” the lawsuit states. “As of year-end 2018, the plan had more than $105 million invested in the John Hancock Multimanager Lifestyle Balanced Fund, and had over $295 million invested in the target-risk funds in total.  Based on a review of publicly-filed Form 5500s from the 2017 and 2018 plan years for plans with over $500 million in assets, plaintiff is not aware of any defined contribution plan other than the plan that offered John Hancock’s target-risk funds (Multimanager Lifestyle Balanced, Conservative, Moderate, Growth or Aggressive) during that time period. The fiduciaries of other large defined contributions did not utilize these John Hancock target-risk funds for good reason. As of the end of 2019, all five target-risk funds materially trailed their custom benchmarks.”

According to the plaintiff, superior alternatives existed for each of the target-risk funds in the plan, and the fact that John Hancock used its own target-risk funds in spite of these superior alternatives “supports an inference that its process for selecting and monitoring the plan’s investments was self-interested and imprudent.”

The complaint goes on to allege that, in addition to the failures with respect to the plans’ investment program, the firm failed to properly monitor and control the plan’s recordkeeping expenses.

John Hancock declined to comment about the lawsuit. The full text of the complaint is available here.

Can ‘White Glove’ Brokers Steal Fidelity’s Lunch?

High-end brokerage firms are seeing the appeal of being able to serve the middle and mass affluent markets, thanks in large part to the success of Fidelity and Charles Schwab.

According to Rob Foregger, co-Founder of Next Capital, one of the biggest but somewhat overlooked financial news stories unfolding right now is exemplified by the ongoing work of Goldman Sach’s young Marcus division.

The Marcus division, Foregger explains, has been working to reshape Goldman Sachs into a more “vertically integrated” investment company that seamlessly spans between mass market, mass affluent and high net worth.

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“For decades, the large private banks and wirehouse brokers have focused on high and ultra-high net worth customers only,” Foregger tells PLANADVISER. “What these white-glove institutions failed to understand was the mass market and mass affluent customers of today are the high net worth customers of tomorrow.”

For its part, Goldman Sachs made the decision to enter the consumer finance sector back in 2015. In April 2016, Goldman Sachs Bank USA (GS Bank USA) acquired GE Capital Bank’s U.S. online deposit platform—a transaction that doubled the firm’s client count. This enabled Goldman Sachs, in turn, to provide an online bank for retail customers, offering savings products. Later that year, the firm launched the Marcus platform, initially offering no-fee unsecured personal loans. By the end of 2017, Marcus’ online lending platform originated $2 billion in loans, and the firm integrated GS Bank USA’s online deposit platform under the Marcus brand. Then, in April 2018, GS Bank USA acquired Clarity Money Inc., a personal finance management app, and thereby onboarded more than 1 million Clarity Money customers. Most recently, in August 2019, Apple Card launched in the United States, the result of a collaboration between the Marcus team and Apple—offering the first credit card product issued by Goldman Sachs in its 150-year history.

Foregger highlights this story because of the dramatic strategy shift it represents for Goldman Sachs.

“When we think about the motivation behind the recently announced acquisition of E*TRADE by Morgan Stanley, it’s very much a reflection of the same motivations driving Marcus,” Foregger says. “Both Goldman and Morgan Stanley have operated so high up in the wealth management market that it’s really remarkable for those of us who have long been in this space to see the change to a focus on mass retail.”

It seems clear at this juncture that both Morgan Stanley and Goldman Sachs are banking on strategies that will see clients graduate through various levels of services and products. In other words, it’s still an important goal for both companies to be serving the high-net-worth and especially the ultra-high-net worth clientele. This strategy simply ensures they will have access to the next generation of wealthy Americans as they are becoming wealthy—rather than seeing those dollars go to discount providers such as Fidelity or Charles Schwab.

“It’s interesting, right? This is a strategy that the Fidelity and Charles Schwab have been using for decades now, to their great benefit,” Foregger explains. “The reality is that, looking at inflows, Fidelity and Charles Schwab are absolute monsters now.”

Foregger says he remembers industry professionals—including the then-leaders of Morgan Stanley—opining back in the late 1990’s that these “upstart online brokers” would never amount to anything more than an “interesting niche play.” They would “never be primary asset gatherers.”

“Now in 2020 such comments look ridiculous,” Foregger laughs. “These large, historically high-end brokerage and advisory firms are finally coming to see how their lunch is being eaten, from a flows perspective. In that sense, these strategic shifts we are seeing across the industry are both offensive and defense.”

Foregger says it’s important to understand that Morgan Stanley or Goldman Sachs aren’t simply making a play to scale via “robo advice.”

“These firms are not just making a pure robo play,” he says. “Yes, they see the future is tech-based, but it’s not tech-only. It’s tech plus a human touch. The other dimension at play here is being able to integrate other services into the business model beyond pure investment services—things like health care savings, consumer loans, etc.”

Foregger believes this trend can only accelerate in the future—a fact which may frustrate independent advisers or brokers that are facing a consolidating provider landscape.

“There are a lot of advisers that are frustrated about the consolidation of custodial services, but I don’t think that will lead to any successful anti-trust action to halt these deals,” Foregger says. “More choice will come up in the custody area as needed, I believe. You will see the launch of new tech-driven systems, for example, if they are truly needed.”

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