Compliance November 3, 2020

Court Finds Plaintiffs Have Standing to Sue Universal Health Services

The defendants argued that they lacked standing to recover losses for investments in which they did not invest.

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Universal Health Services’ defendants asked the U.S. District Court for the Eastern District of Pennsylvania to partially dismiss a lawsuit against them, arguing that plaintiffs lacked standing to recover losses for investments in which they did not invest.

The court noted that Congress permits plan participants to sue if the retirement plan fiduciaries allow the plan to pay inappropriate management fees or otherwise lose value for reasons arguably within their control. But they typically cannot challenge losses to funds in which they did not invest. However, it noted that the 3rd U.S. Circuit Court of Appeals recently ruled that participants can challenge decisions which affect the value of the plan if they can allege specific extra costs affecting their funds and therefore imposed upon them.

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The defendants argued the three plaintiffs only invested in seven of the plan’s funds during the putative class period and therefore lacked standing to bring claims about the remaining funds. However, the plaintiffs argued they have alleged injury with respect to each of their claims—which implicate “plan-level conduct”—and, therefore, have standing. The court agreed with the plaintiffs.

“Judge Edgardo Ramos recently evaluated—and denied—a similar argument in Falberg v. Goldman Sachs Group,” the court wrote in its opinion. “He declined to dismiss ERISA [Employee Retirement Income Security Act] breach of fiduciary duty claims even though the plan participant only invested in three of the five proprietary funds at issue. Judge Ramos found the plan participant had standing to bring his claims because he alleged ‘millions in losses to the plan resulting from defendants’ decision to maintain underperforming, high cost funds, which specifically affected him as a participant invested in several of them.’ He further found the allegation the fiduciaries acted in their own interest by offering a category of proprietary, high-cost funds applied to all participants who invested in any one of those funds.”

The court also cited Clark v. Duke University in which the judge found the claims relating to the fiduciaries’ overall decisionmaking processes affected all plan participants, including the named plaintiffs. The judge further found the plan participants had standing to bring their claims related to specific imprudent funds because at least one named plaintiff invested at least one of the funds at issue in the claims.

The first claim in the Universal Health Services lawsuit involves the plan’s inclusion of a suite of 13 Fidelity Freedom target-date funds (TDFs). The plaintiffs allege plan fiduciaries imprudently offered plan participants the high-cost, actively managed suite of funds even though index funds with much lower fees were available. The defendants concede that each plaintiff was invested in at least one of these funds. “As our Court of Appeals held in Sweda, this admitted fact is enough to link them to some of the underperforming funds and demonstrate individualized injury for standing,” the court said.

A second claim alleges Universal Health failed to monitor the plan’s recordkeeping and administrative costs, leading to the plan participants paying much higher fees than necessary. The court found this claim applies to all participants.

A third claim essentially alleges plan fiduciaries lacked a “prudent investment evaluation process.” The plaintiffs allege this imprudent process forced them, and all plan participants, to choose from an “expensive menu of investment options.” The court said it joins other courts in finding that claims relating to allegedly imprudent decisionmaking processes injure all plan participants.

The court found the plaintiffs have standing to move forward on their claims it and denied Universal Health’s motion for partial dismissal. However, it did not determine whether the named plaintiffs are appropriate proper class representatives to bring claims on behalf of all plan participants. “This inquiry may be appropriate at the class certification stage or in understanding their possible damages model,” the court said.

Client Service November 2, 2020

Encouraging Young Part-Time Employees to Save for Retirement

Financial advisers can help part-time employees who will be newly eligible for retirement plans under the SECURE Act get familiar with savings concepts.

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The Setting Every Community Up for Retirement Enhancement (SECURE) Act includes a mandatory requirement for 401(k) plan sponsors to allow long-term part-time employees to participate in their company’s retirement plans after December 31. In the past, most employees had to work 1,000 hours a year to qualify.

Now, those who have worked at least 500 hours each year for three consecutive years and who meet the minimum age requirement of 21 must be offered an opportunity to participate.

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Dan Keady, a chief financial planning strategist at TIAA, says he believes the SECURE Act’s eligibility requirement will spur younger part-time employees to enroll in the future. “We do expect to see more part-time employees participating in company retirement plans going forward, and that is a big positive for individuals,” he says. “It is incredibly important to start saving early and, in doing so, even just a small amount can make a big difference towards an individual’s long-term retirement goal.”

To get started, employers should communicate to younger workers who aren’t participating in the plan through targeted communication and ongoing outreach, Keady says. He says plan sponsors should tell their employees that it’s important to start saving for retirement at an early age, and he encourages employers to think critically about the default option they’re offering for younger workers. Plan sponsors can also provide education on the importance of lifetime income. “Employers play an instrumental role in helping younger workers get started on their financial journey,” he says.

Robert Conzo, CFP, CEO and managing director of The Wealth Alliance, shares a similar thought. He says emphasizing the effects of saving early can motivate workers in their 20s—especially part-time employees—to begin contributing. For example, those who begin saving for retirement during their early 20s and achieve an average rate of return can double their money by age 65, he says. 

Enrolling in a company’s 401(k) plan means these participants will likely be exposed to other employer-sponsored benefits, including financial advice. Since younger workers often do not have enough assets under management for advisers to make an appropriate profit, some advisers are offering subscription services with monthly fees to provide services, Keady says. But younger workers can also check in with their employer’s benefits staff about free services linked to the plan. “Before entering into these services, be sure to check out free advice associated with your workplace plan, as this may meet your needs,” he says.

Personalizing financial advice is also effective at encouraging people to save, and particularly so for part-time workers, who may not be financially prepared to start on their retirement savings. “Employers should understand how to connect with younger people and drive the main thing that they understand,” Conzo says. Use the concept of saving $100 a month, or another amount specific to what the employee could afford to help them understand how savings can add up. Another strategy he recommends for younger employees is saving 50 cents for every $1 spent.

Embarking on social media campaigns and marketing services online will also help draw clients to an adviser’s practice, says Conzo. While a Raddon Research study finds that only 29% of Millennials and Generation Zers would take financial advice from a brand ad they saw on social media, these younger workers responded well to influencers who worked with financial advisers. Even if a participant had no personal interest in the influencer, they were more likely to trust their insights than a traditional ad. “Millennials and Gen Zers respond very well to social media,” Conzo  says. “Putting these services on social media, from a savings perspective, is very important and that’s another way of reaching participants.”

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