Compliance February 3, 2021

Actively Managed Funds and High-Cost Share Classes Called Out in ERISA Suit

Participants of a terminated 403(b) plan say the plan sponsor's fiduciary breaches caused them approximately $4.6 million in losses.

Reported by


A group of 403(b) plan participants are suing their employer for allegedly keeping imprudent investments as choices in the plan and for causing them to pay excessive fees for plan investments, among other things.

According to the Employee Retirement Income Security Act (ERISA) lawsuit, “for the period beginning January 1, 2015, through the date the plan was terminated, May 31, 2019, plan participants lost approximately $4.6 million due to excessive fees and costs as a result of Columbus Regional’s breaches of fiduciary duty.”

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

The lawsuit alleges that Columbus Regional Healthcare, which was acquired by Atlanta-based Piedmont Healthcare in 2018, selected and maintained actively managed funds in the 403(b) plan “in the hope of generating ‘excess returns.’” However, it says the health care system ignored the “red flags” of high expense ratios which cost participants millions of dollars. The plaintiffs say the actively managed funds underperformed and did not recoup them for high fees. The lawsuit claims a prudent fiduciary would have considered index funds as options for the plan.

The health care system is also charged with selecting high-priced share classes and not negotiating as a “large plan” for lower-priced share classes.

The lawsuit says Columbus Regional failed to prudently select, evaluate and monitor the plan’s target-date fund (TDF) suite. It says the family of TDFs managed by American Century did not have a consistent track record of outperforming the market and that the returns did not justify their costs. In addition, Columbus Regional is accused of selecting the most expensive share classes for the TDFs—Class A—when it could have selected cheaper R-6 share classes.

The lawsuit also calls out the stable value fund selected by Columbus Regional, saying it generated lower returns than “substantially identical” stable value funds offered by other investment managers.

Plaintiffs challenge the administrative expenses of the plan, saying that revenue sharing hid the true cost of the plan. They say the fees charged by the investment adviser to the plan were “grossly excessive” and that the fees charged by the plan’s recordkeeper were 1.7 to 3.1 times what a reasonable fee would have been.

Plaintiffs also say they were not provided with information they needed to make informed investment decisions. They say Columbus Regional did not disclose the excessive fees participants were paying and that it had selected higher-cost share classes for investments in the plan. “The disclosures Columbus Regional did provide to participants consisted of incomplete and vague boilerplate [information] furnished by the very same service providers that benefited from the excessive fees and kickbacks,” the complaint states.

Columbus Regional’s parent company did not respond to a request for comment.

Deals & People February 2, 2021

‘Sell and Stay’ Is the Norm for RIA M&A Deals

Most firm owners say they would prefer to ‘sell and stay’ for a defined period of time after a deal closes—and ultimately participate in the growth opportunities created by the combined entities.

Reported by

Last week, PLANADVISER reported on some of the findings from Echelon Partner’s registered investment adviser (RIA) and wealth manager merger and acquisition (M&A) summary analysis for 2020.

In addition to mapping out the record pace of M&A action, the Echelon report highlights the fact that “breakaway” activity remains strong in this industry, even as so much emphasis is given to the strategic M&A deals. The report describes “breakaway” activity as “a relatively underappreciated phenomenon that increased in prevalence over the past decade.”

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

Another timely topic explored in the report is the reason(s) cited by RIA owners for why they were motivated to engage in a given transaction. According to Echelon’s analysis, there appear to be three primary and common objectives mentioned by sellers.

The first objective is the ability for firm’s owners to “sell and stay,” meaning they plan to remain engaged in their business for a defined period of time after a deal closes. This approach means they can ultimately participate in the growth opportunities created by the combined entities. Numerous deals reported recently by PLANADVISER fit this character. 

“A growing number of deals in 2020 were structured to enable this alignment, which is designed to benefit both sellers and buyers, and creates the potential for higher deal valuations if post-close targets and goals are met,” the analysis explains.  

The second main theme is one that is obvious and well appreciated: unlocking growth and synergy values.

“The number of buyers, their maturity and the benefits of scale that institutions can provide to advisers were key considerations for many sellers in 2020,” Echelon reports. “Sellers now have a greater ability to tap into larger, national firms that can often introduce a wealth manager to new markets, a deeper set of prospects and advanced marketing capabilities.”

According to Echelon, as buyers have built up their infrastructure and worked to centralize their resources, sellers have more options to offload their technology, investment management or other “non-core operations.”

“In the process, sellers acquire the time, resources and capacity to focus on accelerating organic growth and increasing the value of their businesses,” the report explains.

The final primary motivation cited by RIAs and wealth managers is career development and growth opportunities for “G2,” i.e., the second generation of leadership.

“As founders sought to initiate their transitions out of the business, buyers that could present career paths and continued growth opportunities to remaining employees were particularly attractive to sellers,” the analysis says. “A typical $1 billion RIA, for example, can often have 15 to 25 employees. Continuity in the business—for clients, employees and the buyer—is an essential ingredient for a successful integration and long-term growth.”

«