Arguments in the new case closely resemble previous lawsuits filed against other firms citing the ERISA fiduciary duties of prudence and of monitoring fiduciaries.
Plaintiffs have filed a new Employee Retirement Income Security Act (ERISA) lawsuit in the U.S. District Court for the Southern District of New York, naming as defendants Deloitte LLP, the company’s board of directors and various other related entities.
The suit alleges the defendants permitted the payment of excessive administrative and recordkeeping fees in the operation of a 401(k) plan and a profit-sharing plan provided to Deloitte employees.
According to the plaintiffs, the plans’ billions of dollars of assets under management (AUM) qualifies them as jumbo plans in the defined contribution (DC) plan marketplace.
“As jumbo plans, the plans had substantial bargaining power regarding the fees and expenses that were charged against participants’ investments,” the complaint states. “The defendants, however, did not try to reduce the plans’ expenses or exercise appropriate judgment to scrutinize each investment option that was offered in the plans to ensure they were prudent. … Based on this conduct, the plaintiffs assert claims against the defendants for breach of the fiduciary duty of prudence (Count One) and failure to monitor fiduciaries (Count Two).”
The plaintiffs’ arguments in this case closely resemble those of previous ERISA cases filed against large national employers citing the ERISA fiduciary duties of general prudence and of monitoring fiduciaries. Notably, these cases have been met with varied results, depending on the facts at hand and the views of the courts asked to review them. For example, Prudential recently defeated a similarly structured lawsuit based on the plaintiffs’ failure to plausibly establish standing. The same result was reached in an ERISA lawsuit filed against TriHealth. On the other hand, the defendants’ dismissal motions failed in a similar suit targeting Allstate.
Broadly speaking, the success of such suits ties back to the ability (or lack thereof) of the plaintiffs to demonstrate that the payment of high fees or the provision of underperforming investments was likely the result of fiduciary breaches. In other words, merely stating that a plan paid fees that were higher than its peers or offered investments that underperformed other possible investment options is not enough to establish standing under ERISA.
Here, the plaintiffs suggest that the Deloitte plans, with more than 89,000 participants and over $14.5 billion in assets as of 2019, should have been able to negotiate a recordkeeping cost in the low $20 range from the beginning of the proposed class period. The plaintiffs allege that “poorly performing plans” pay no more than $60 per participant for recordkeeping, and that Deloitte has paid annual fees of about $65 to $70 per participant in the 401(k) plan and upward of $200 per participant in the profit sharing plan.
“[Given] the fact that the plans have stayed with the same recordkeeper, namely Vanguard, since at least 2004, paid an increasing amount in recordkeeping fees from 2018 to the present, and paid outrageous amounts for recordkeeping from 2015 to 2017, there is little to suggest that the defendants conducted a request for proposals [RFP] at reasonable intervals—or certainly at any time prior to 2015 through the present—to determine whether the plans could obtain better recordkeeping and administrative fee pricing from other service providers, given that the market for recordkeeping is highly competitive, with many vendors equally capable of providing a high-level service,” the complaint states.
The plaintiffs go on to make very similar arguments with respect to the plans’ investment options.
“The excessive costs of the funds also provide indirect evidence, along with the excessive recordkeeping and administrative costs, that the defendants did not employ a prudent process to monitor the plans’ costs,” the lawsuit states. “Failure to select funds that cost no more than the average expense ratios for similar funds in similarly sized plans cost plan participants millions of dollars in damages.”
Deloitte has not yet responded to a request for comment about the lawsuit. The full text of the complaint is available here.
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Broadridge enhances fiduciary toolkit for advisers; GoalPath makes managed accounts available on iJoin; BlackRock announces option to include annuities in target-date strategies; and more.
Broadridge Enhances Fiduciary Toolkit for Financial Advisers
In order to meet the growing demand for environmental, social and governance (ESG) analysis from investors and advisers, fintech firm Broadridge has announced an enhancement to its Fi360 Fiduciary Focus Toolkit, allowing financial advisers to leverage ESG rating data from OWL Analytics when evaluating investment decisions.
“Interest in ESG investments is accelerating among U.S. investors, and they are looking to advisers and plan sponsors to provide the desired products to meet their financial and personal goals. This is both an opportunity and a challenge for fiduciary advisers,” says John Faustino, head of Broadridge’s fiduciary certification and training solutions. “It is a natural evolution of the Fiduciary Focus Toolkit to help advisers identify ESG exposures that align with sound fiduciary due diligence.”
The Fiduciary Focus Toolkit, a web-based software solution that provides analytical, management and reporting features for investment managers, enables advisers to implement a prudent investment process. Through this enhancement, advisers can use the ESG scoring as standalone screening criteria or in conjunction with other metrics such as returns, alpha or the Fi360 Fiduciary Score, giving advisers the ability to search for and monitor funds on pecuniary merit first and then overlay the ESG screening.
ESG ratings from OWL Analytics will automatically update monthly within the Fiduciary Focus Toolkit. Investments are scored for overall ESG factors, as well as the individual environmental, social and governance level so advisers can perform the analysis based on what’s important to the client or retirement plan.
GoalPath Makes Managed Account Program Available on iJoin
GoalPath Solutions (GPS) and LDI-MAP (doing business as iJoin) have announced that GoalPath’s Plan Success—a program comprised of its managed account offering delivered with integrated financial wellness, education and financial coaching services—is now available on the iJoin platform.
This program is available on any recordkeeping platform that uses iJoin and is designed to complement and expand employee education services delivered by advisers.
GoalPath’s “manage-it-for-me” investment option may be deployed as the plan’s qualified default investment alternative (QDIA) on an opt-out basis or a participant-selected opt-in basis.
“Integrating a financial wellness program with a customized managed account program just makes sense. A personalized investment strategy becomes even more powerful when it is paired with a personalized financial wellness program that helps an employee address basic financial needs like managing debt, budgeting and financial planning,” says GoalPath CEO Marko Ungashick. “It is a powerful combination designed to help local advisers demonstrate value to the employers and employees they serve.”
“iJoin’s native managed account program methodology and integrated financial wellness tools pair well with a partner like GoalPath. This offering reflects the potential of personalization expressed both digitally and personally,” says iJoin CEO Steve McCoy.
BlackRock Announces Option to Include Annuities in Target-Date Strategies
BlackRock says it will soon begin offering its LifePath Paycheck solution as a default investment option in employees’ retirement plans, which will allow plan participants to have the option to obtain a guaranteed income stream in retirement.
BlackRock says its solution embeds annuity contracts issued by Equitable and Brighthouse Financial directly into a target-date strategy. When a participant reaches age 59.5, the LifePath Paycheck solution offers the participant the option to purchase fixed individual retirement annuities from the insurers that will provide a guaranteed stream of income for life.
“People are more reliant on their defined contribution [DC] savings than ever before,” says Greg Fox, head of U.S. DC retirement income solutions at Aon. “In response to this, many employers are looking for ways to transform their plans to not only help employees save and invest for retirement, but also help them thoughtfully and effectively spend down their savings as they transition into retirement.”
BlackRock notes that research from Voya finds 90% of individuals think having a guaranteed source of income in retirement so they don’t outlive their savings is important or extremely important.
Vanguard Expands Active Roster With Core-Plus Bond Fund
Vanguard has launched the actively managed Vanguard Core-Plus Bond Fund, which seeks to offer clients a diversified, single-fund, core fixed-income portfolio invested primarily in U.S. Treasury, mortgage-backed and other U.S. investment-grade securities. The firm says the fund may also invest beyond the U.S. investment-grade bond market in areas such as high-yield corporate securities and emerging markets debt of all credit quality ratings.
Vanguard says the Core-Plus Bond Fund’s mandate enables portfolio managers to pursue opportunities across various fixed-income sectors and credit qualities. The fund is managed by Vanguard’s fixed income group.
“Vanguard continues to invest in active management talent and capabilities, building upon four decades of expertise in running bond portfolios,” says Sara Devereux, global head of the Vanguard fixed income group. “This initiative represents our ongoing efforts to improve long-term investor outcomes by offering higher-potential return fixed-income strategies with enduring investment merit at a low cost.”
With the addition of Core-Plus Bond, Vanguard now has three core bond offers: Vanguard Total Bond Market Index Fund, Vanguard Core Bond Fund and Vanguard Core-Plus Bond Fund. The Total Bond Market Index Fund is the most conservative option for investors favoring index management. While still conservative, the firm says its Core Bond Fund offers the potential to outperform through active management.
With greater exposure to high-yield and emerging markets investments, the new Core-Plus Bond Fund is designed for investors who are more comfortable with higher risk in their fixed-income allocations and the potential to outperform through active management. However, Vanguard notes that the fund’s greater exposure to high-yield investments may not be suitable for certain investors.
The Core-Plus Bond Fund is accepting investments during a 10-day subscription period and will begin trading on October 25. The fund will have an estimated expense ratio of 0.3% for investor shares and 0.2% for admiral shares.
Qontigo and Willis Towers Watson have launched a family of climate transition indexes.
The firms say the STOXX Willis Towers Watson Climate Transition Indices (CTI) will help investors, governments and companies to manage risk, capture opportunities in their portfolios, align with goals of the Paris agreement and work toward net-zero targets.
“While current climate metrics can help to identify outliers, many current approaches to factoring climate risk into investments tend to be simplistic and fall short of accurately identifying their impact on company valuations,” says David Nelson, Willis Towers Watson Climate Transition Analytics senior director.
The firms say the CTI enables a more sophisticated way of managing climate risk that looks beyond carbon emissions, by evaluating the transition risk and opportunity for each company. A proprietary Climate Transition Value at Risk (CTVaR) measure analyzes the impact on projected company cash flows of moving from a business-as-usual scenario to a world where emissions pathways are fully aligned to the goals of the Paris agreement.
“Investors need a robust framework that can quantify and incorporate the financial impact of climate risk, but this is something that just hasn’t been widely available until now,” says Craig Baker, Willis Towers Watson’s global chief investment officer (CIO). “We believe understanding this transition, through our Climate Transition Value at Risk methodology, should be one of the biggest sources of alpha across all asset classes over the next few years. Climate change is a systemic, urgent global challenge and will significantly disrupt capital allocations and returns.”
BlackRock Launches ETF That Aims to Outperform Fixed-Income Market
BlackRock has announced that it has launched a new exchange-traded fund (ETF): the iShares USD Bond Factor ETF (NASDAQ: USBF). It offers investors a chance to outperform the broader U.S. fixed income market by selecting bonds based on macro and quality and value style factor insights.
USBF, which seeks to track the BlackRock USD Bond Factor Index, has an expense ratio of 0.18%, or $1.80 for every $1,000 invested—which BlackRock says is lower than 86% of mutual funds and ETFs in the Morningstar Core Bond category.
BlackRock says many debt market participants are seeking to navigate credit risk—i.e., the ability to be repaid in full and on time—and interest rate risk, given how yields could rise after not only recent all-time lows, but also four consecutive decades of declines. By applying a rules-based, transparent factor, or “smart beta,” investing lens to bonds, USBF pursues a strategy that seeks to provide a diversified selection of U.S. dollar-denominated bonds while enhancing total return relative to the broader U.S. fixed-income market and retaining similar risk characteristics.
“Historically low yields heighten the importance of broadening potential sources of fixed-income returns,” says Karen Schenone, head of iShares U.S. fixed income strategy within BlackRock’s global fixed income group. “USBF follows an index that systematically looks at all types of bonds—investment-grade corporate debt, Treasurys, high-yield bonds and mortgage-backed securities—to adjust its holdings based on various risk-on and risk-off macroeconomic environments, offering an opportunity to place a dynamic bond allocation at the core of your portfolio.”
“Using macro and style factors for U.S. core fixed-income assets can provide distinct and complementary sources of returns,” adds Andrew Ang, head of factor investing strategies at BlackRock. “USBF’s investment strategy harvests the value factor to identify underpriced securities, while using the quality factor to uncover the investment-grade and high-yield corporate bonds that exhibit lower probabilities of default. We believe this can be a possible winning alternative to broad-based debt market exposures.”
