Empower Hit With Government Markets Lawsuit

The complaint has alleged fiduciary breach under the Investment Advisers Act. 



Former participants in government 457 plans run by Empower Retirement and affiliates Great-West Funds and Putnam Investments brought a lawsuit alleging breach of fiduciary duty against the firms and related companies.

The lawsuit was brought under the Investment Advisers Act, the federal law that regulates investment advisers.

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Additional named defendants to the lawsuit are Advised Assets Group, Great-West Lifeco, Great-West Life & Annuity Insurance Company, Empower Annuity Insurance Company of America and Empower Advisory Group.  

The plaintiffs complaint centers on Empower’s government markets division, the filing shows. Many state and local government workers can—in addition to pensions—save for retirement in supplemental 457 defined contribution plans.

The complaint has alleged Empower used deceitful sales practices to boost use of managed accounts.

Plaintiffs claim fraudulent sales practices comprised a breach of fiduciary duty to participants. The complaint alleges Empower instructed government plan advisers to use fraudulent sales tactics that caused employees to be “lured into the Empower-owned,” higher fee managed account option, filled with Empower-affiliated Great-West and Putnam funds, while lower cost investments were available from competitors.   

“As profitability of its retirement plan administration business dwindled, Empower instituted a companywide policy requiring the use of fraudulent sales tactics to induce individuals to transfer assets from their low-fee employer sponsored retirement plans to Empower’s higher fee managed account product, which contains individual funds owned by Empower’s sister companies,” the complaint states.

An Empower spokesperson said in an email the lawsuit is without merit.

“This is a lawyer-driven lawsuit filed by two individuals purportedly on behalf of a class of others. The lawsuit was not filed by a plan sponsor or an adviser. Anyone can file a lawsuit and in so doing they can make claims that are not valid. We believe our products and services are compliant with the applicable rules and are beneficial to our clients, helping them meet their retirement goals,” the email stated.

The lawsuit was filed by Forest James IV, an attorney with Birmingham, Alabama-based law firm, Fob James Law Firm, and James Z. Foster, with Atlanta-based Foster Law. 

Government 457 defined contribution plans are not subject to rules and requirements of the Employee Retirement Income Security Act, as are private-sector 401(k) plans.

Empower-managed accounts are designed to allow plan sponsors a way to provide greater personalization for workers’ retirement savings and investments that are tailored to a participants’ specific circumstances.

For example, their total assets needed for retirement, time to retirement, and risk tolerance. For the service and greater personalization, managed account fees are higher than plain-vanilla target-date funds with a traditional glide path that de-risks as the participant nears retirement. The managed account is overseen by a discretionary portfolio manager who makes investment decisions for individual participants.

“Empower used its knowledge as a retirement plan administrator to identify vulnerable unsophisticated investors and individuals with large account balances nearing retirement as targets for Empower’s sales representatives, who then used manipulative sales tactics and falsely portrayed Empower’s higher-fee Managed Account as the preferred solution without regard to whether the recommendation was in the participants best interest,” according to the complaint.

An Empower spokesperson said in an email the lawsuit is without merit.

The lawsuit seeks class action status. The complaint was filed in U.S. District Court for the District of Colorado.

 

Echelon: Investment Adviser M&A Bucks Downward Trend in Dealmaking

Private equity continues to be attracted to wealth management M&A despite the current market volatility, according to Echelon Partners’ Q3 RIA deal report.





Mergers and Acquisitions (M&A) activity has been stymied in many sectors, but it’s still going at a good clip in the investment adviser and brokerage space in 2022, according to investment bank and management consultancy Echelon Partners.

Wealth management M&A activity was up year-over-year to 84 deals in Q3 2022 as compared to 78 deals in Q3 2021, Echelon said. Deal-making activity declined from the previous two quarters of 2022, but the firm is still forecasting a total of 345 deals in 2022, trumping 2021’s total of 307 transactions.

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“Deal activity in wealth management has remained relatively resilient despite a global slowdown in M&A, which has been spurred by the rising interest rate environment and geopolitical instability,” Echelon said in its Q3 RIA M&A Deal Report released this week.

Transaction activity among registered investment advisers (RIAs) has been steadily growing since 2020, and by the end of this year, will likely hit a record since Echelon started reporting in 2016. Acquisition interest in RIAs is in large part driven by private equity capital that sees value in consolidating players in the crowded and maturing wealth management sector, says Brett Mulder, a vice president at Echelon Partners.

“It seems like those forces are going to keep propelling activity at least in the near-term,” Mulder says.

Meanwhile, market volatility may be creating an opportunity for investors, rather than being a deterrent. “They may potentially be taking advantage of any dislocation created by volatility in the markets,” Mulder says.
 
Echelon said 42% of deals through Q3 2022 have been by strategic acquirers or consolidators, and that private equity firms made direct investment of $80 billion in assets under management (AUM) in the quarter.
 
Demand for wealth technology solutions, including those by startups, has also been a driver of M&A, according to the report. Interest in tech-enabled product distribution, artificial intelligence, and automated billing are all driving deal interest.

Deals Up, AUM Down

Although the number of deals is robust, the average AUM per deal year-to-date has dropped to $1.7 billion, 17% lower than last year’s roughly $2.1 billion average, according to the report. This drop is indicative of the decline in AUM with both equities and bonds being down, Mulder says. Of the deals that were announced in Q3 2022, 43% of the acquired firms have less than $1 billion under management, and average AUM transacted in the deals was about $389 million.

The relatively small of the transactions means that rising interest rates, which makes borrowing to fund deals more expensive, is often not an issue for the acquirers, Mulder says. Many private equity firms are either funding the deals from their own credit facilities or from capital on their balance sheets, he says.

Rising interest rates is just one of the handful of challenges that is crimping M&A in the broader market, according to a mid-year report by consultancy PWC. The firm also notes headwinds such as the war in Ukraine and the drop in equity markets, saying that dealmakers are “facing arguably one of the – if not the – most uncertain and complex environments in recent memory.”

Despite these headwinds, adviser M&A and investment is continuing to make headlines in Q4. In just the past few weeks, deals have been announced including private equity firm Platform Partners LLC agreeing to invest in the growth plans of retirement provider JULY Business Services, and private equity firm Valeas agreeing to a $200 million minority stake in wealth manager Sequoia Financial Group.

CAPTRUST, a retirement solutions provider, also bought a Boston-Area adviser that oversees $900 million in assets. CAPTRUST has more acquisitions in progress, said Rick Shoff, managing director of CAPTRUST’s advisor support group.

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