Complaint Questions Advisory Fee Breakdown

A new proposed class action lawsuit suggests two providers were less than forthcoming about the real breakdown of advisory fees and underlying service arrangements. 

Plaintiff Lisa Patrico has filed a proposed class action suit on behalf of the Nestle 401(k) Savings Plan “and all other similarly situated qualified retirement plans,” under Sections 502(a)(2) and 502(a)(3) of the Employee Retirement Income Security Act (ERISA), targeting Voya Financial, Inc.

Other named defendants include Voya Institutional Plan Services, LLC; Voya Investment Management, LLC; and Voya Retirement Advisors, LLC. According to the broadly reaching complaint, the defendants provide services in connection with the administration of the Nestle 401(k) program and many others.

The plaintiff lays out her argument as follows: “ERISA’s prohibited transaction rules prevent a plan fiduciary, which includes the investment adviser, from causing the plan to engage in various transactions with ‘parties in interest’ which also include the investment adviser—the so-called transactional prohibitions. The prohibited transaction rules also prevent the investment adviser, generally, from causing the plan to engage in a transaction that would generate additional fees for the fiduciary investment adviser—the so-called self-dealing prohibitions.

“As a result of these prohibitions and in the absence of any applicable exemption, a financial institution such as Voya—which provides, trust, recordkeeping, brokerage and other services to qualified retirement plans, as well as investment funds—could not provide investment advice to participants. Voya could not do so out of concern that advising participants to invest in Voya’s own funds would be a prohibited transaction in violation of ERISA § 406.”

According to the compliant, one common and obvious solution to this problem is to have the investment advice provided by a registered investment adviser (RIA) that is independent of and unrelated to the financial institutions whose funds were included as investment choices in the plan.

“This would ensure that the fund provider did not have a financial stake in the outcome of the advice,” the complaint suggests. In this case, according to the complaint, the independent RIA Financial Engines Advisors LLC (FE) “claims to fulfill that role, and FE has become the preeminent purportedly independent investment advice provider to 401(k) plan participants.”

The complaint goes on to suggest that Voya “determined to make available investment advice services to the participants of its customers’ plans. If, however, Voya were to allow such services to be provided through an independent and unrelated investment adviser, Voya would lose out on all the associated fees it could charge to participants.” Accordingly, in breach of duty, the plaintiff alleges Voya “devised a strategy that would satisfy the need for a supposedly independent investment adviser while preserving Voya’s ability to collect fees for the program: Voya offers the advice program through Voya Retirement Advisors LLC and charges a fee for the service, but subcontracts with Financial Engines to actually provide the investment advice.”

NEXT: Breaking down the allegations 

According to disclosures made to Nestle employees and employees of other employers whose 401(k) plans are administered by Voya, Voya Retirement Advisors charges each participant 50 basis points for the first $100,000 of the individual’s account managed by Voya Retirement Advisors, 40 basis for the next $150,000, and 25 basis points for amounts in excess of $250,000.

“As it turns out, Voya Retirement Advisors does not actually provide any material services in connection with the advice provided to participants,” the complaint alleges. “Instead, virtually all of the services in connection with the advice program are provided by Financial Engines. To be sure, Voya undertakes to make it appear that Voya Investment Advisors is materially involved in the process. The Nestle Savings Plan brochure announcing the advice program, which ... on information and belief was drafted at least in material part by Voya, states that the program is ‘powered by Financial Engines,’ but the associated footnote states: ‘Advisory Services provided by ING Investment Advisors, L.L.C. for which Financial Engines Advisors, L.L.C. acts as sub advisor.’”

The same footnote appears in Nestle Savings Plan participants’ quarterly statements that are “signed” by ING (now Voya) Investment Advisors LLC, according to the complaint.

The complaint continues: “Voya provides no material services in connection with the advice program, and the only reason for structuring the advice service as being provided by Voya with sub advisory services by Financial Engines is to allow Voya to collect a fee to which it is not entitled … There are alternative ways to view the true nature of this arrangement, all of which run afoul of ERISA’s fiduciary and prohibited transaction rules.”

From one perspective, according to the plaintiff, Voya has “interposed itself between the participants and Financial Engines and charged a fee simply, and unreasonably, to allow participants access to an advice program that is performed entirely or nearly entirely by Financial Engines. Voya pays Financial Engines only a portion of the fee being charged to participants, keeping the other substantial portion for itself …  From another perspective, Financial Engines, the true service provider, is charging the fees detailed in paragraph 10 above. Financial Engines then pays Voya a percentage of that fee. This arrangement violates ERISA § 406(b)(3), which prohibits a plan fiduciary from receiving any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan.”

Regarding the allegations, a Voya spokesperson shared this statement with PLANADVISER: “Voya denies any wrongdoing and intends to vigorously defend the litigation. As one of the largest providers of employer-sponsored retirement plans, Voya is committed to providing clear and comprehensive fee and expense information to our clients and their plan participants. We support transparency and candid communications about plan features and costs so that our clients can make informed decisions on choosing the plan solutions and services that offer them the best value. We value our clients and the trust they place in us. Voya Financial is dedicated to helping Americans plan, invest and protect their savings so they can retire better.”

The full text of the complaint is available here