Data & Research February 21, 2024

Encore Fiduciary Finds Inaccurate Fee Benchmarking in 401(k) Litigation

Fiduciary expert says the plaintiffs’ use of Form 5500s to measure fees creates erroneous comparisons, and he recommends its new study for large plan fiduciary defense.

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Encore Fiduciary, a liability insurance underwriter, is promoting its new large plan sponsor benchmarking study as a way for fiduciaries to go on the offense when faced with 401(k) excessive fee litigation.

Encore, a division of Specialty Program Group LLC and recently rebranded from Euclid Fiduciary, discussed on Tuesday the results of a recordkeeping and benchmarking database for large plan fees; the firm first released the report in late January.

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Daniel Aronowitz

During the webinar, Daniel Aronowitz, president of Encore Fiduciary, showcased examples in which he argued that participant fees were exaggerated by plaintiffs as well as compared to unfair benchmarking—often resulting in multimillion dollar settlements by plan sponsors.

“The recordkeeping fees of most of plans are reasonable,” Aronowitz said on the webinar. “Fees paid are generally exaggerated or misrepresented, and [defense attorneys] have been responding by playing defense.”

Excessive fee cases have been a driver of 401(k) litigation in recent years. In 2023, 48 excessive fee and performance lawsuits were filed in 2023, a decline of 89 from the prior year, according to reporting from Encore.

On the call, Aronowitz pointed to the “original excess recordkeeping claim template” as starting in 2016, when 20 similar complaints were filed against universities for allegedly hiring recordkeepers that overcharged participants. In one complaint, Hughes v. Northwestern, plaintiffs alleged that a reasonable recordkeeping fee would be $35 per participant—a fee Aronowitz argued on the call was not an accurate benchmark.

Of those 20 complaints, Encore noted, 15 have been settled for a total of $152.9 million, or $10 million on average, four are still pending, and one was voluntarily dismissed.

“The premise of many, if not the vast majority of excess fee cases, that most large $500 million or more asset plans pay $35 or less is false,” Aronowitz said.

Unreliable Sources

At issue in defending such claims, according to Encore’s report issued with the benchmarking study, is that the U.S. Supreme Court, when hearing Hughes v. Northwestern, held that all excess fee imprudence claims based on circumstantial evidence “must be subjected to context-based scrutiny.” That has left defendants with the need for a “reliable, third-party benchmark.”

In recent 401(k) suits, plaintiffs have argued that plan fiduciaries have not followed their mandate because they have not sought out the lowest fees for participants, often showcasing both the fees charged, as well as benchmarks to lower options in the marketplace.

Aronowitz, however, argues that many plaintiffs are drawing on participant fee comparisons from Form 5500s as opposed to participant fee disclosures provided by recordkeepers. Those Form 5500s, he said, are not representative because they include other transaction fees.  

He also says that, when benchmarking, plaintiffs compare average fees that are “cherry-picked” and inaccurate to the large plan market.

Encore specifically pointed to three main strategies in excessive fee arguments:

  • Using the benchmark of small-plan recordkeeping data from a source called the “401k Average Book,” while “intentionally” leaving out the fact that the plans use indirect revenue sharing of over $150 per participant on average to fund recordkeeping fees, according to Encore.
  • Alleging that the country’s largest recordkeeper, Fidelity Investments, only charges participants $14 to $21 for recordkeeping services, a number cited in the discovery that Encore says is not a reliable average.
  • Comparing the fees from large plans with low fees by cherry-picking “random plans” that don’t represent the market.

Playing Offense

In its own benchmarking report, Encore drew on Department of Labor-mandated fee disclosures from over 2,500 large plans with assets exceeding $100 million, and over 1,000 participants for the years (2020, 2021, and 2022). Through its analysis, the firm found that large plans with $500 million to over $1 billion in assets pay more than $21 per participant for recordkeeping fees.

Encore’s report, based on 2022 data, reports fees by plan size of:

  • $500m-1b Plans: In 2022, 90% of plans with assets between $500m and $1b in assets paid over $35 per participant, with 80% of plans paying between $35 and $66 per participant.

  • $1b-5b Plans: In 2022, 90% of all plans with assets between $1b and $5b paid more than $26 per participant, and 80% of all such plans paid between $26 and $53 per participant.

  • $5b+ Plans: In 2022, 90% of all plans with assets over $5b paid $20 or more per participant, and 80% of plans of this size paid between $20 and $40 per participant.

“We took action to fill the void that the plaintiff bar is exploiting,” Aronowitz said. “Right now, we’re playing defense. We’re saying our fees are not excessive rather than showing that the fees being charged are right in the wheelhouse of what other firms are charging.”

During a question period on the call, Aronowitz said the firm would like to see its benchmarking incorporated into future motions to dismiss excessive fee claims.

Products & Services February 21, 2024

Startup Salt Labs Seeks to Disrupt Savings Benefits for Hourly Workers

Founder Jason Lee, who started DailyPay, has $18 million in seed funding in under one year for a program to disrupt benefits programs such as 401(k)s.

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Salt Labs Inc. Founder and CEO Jason Lee has spent many hours speaking with low-income workers about their finances for startup ventures seeking to improve workplace benefit programs. With Salt Labs, his latest startup operating out of a New York headquarters with $18 million in seed funding raised in under a year, he believes he has found a savings program that will work for this cohort of workers.

“We have built [a savings] program that you can’t spend,” Lee says. “It’s this thing that lives in our app that’s called Salt. … It naturally accumulates because you can’t spend it.”

Jason Lee

Salt Labs’ invention is a benefits system that lets employees earn a virtual reward, or Salt, for every hour they work. The employees can see their Salt accumulate through an app on their phone; it does not require them to do any work and does not draw down from their pay. As Lee says, workers cannot spend Salt at first, but when they build up enough rewards, they can tap the savings to pay for things like a trip, a large purchase or even an investment in an individual retirement account, via options Salt makes available to employers.

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Lee says that, rather than taking money out of an employee’s compensation or providing an employer match that they “cannot see,” Salt Labs charges the employer for every Salt that is mined. Meanwhile, the employee sees the Salt grow and can set their own personal goals or targets.

“What we tell the employer is, ‘If you wanted your employees to save money, and you paid them 10 cents more an hour or whatever, that money will disappear,’” he says. “That’s for the simple reason that the 10 cents of your pay looks like the rest of your paycheck. We’ve built technology that actually separates those cash flows.”

401(k) Disruptor

When setting up the firm, Lee delved into the 401(k) industry, talking to leading experts and looking into recent retirement reform legislation intended to expand access and growth of deferred compensation retirement savings. He does not believe those efforts will move the needle for hourly workers in restaurants, hospitality, manufacturing, retail or other jobs that may offer a 401(k), but not robust enough salaries for workers to defer it for long-term savings.

“One of the observations that I’ve made with lower-income earners is that every single financial plan, savings program, retirement account—everything that we have today requires the saver to take something out of their paycheck and to put it in the future,” he says. “Here’s the problem: For a low-income worker, they don’t have enough salary. To get that person to try to reduce an already scarce resource is virtually impossible.”

Lee believes that is why there is a savings crisis in the U.S., and why generational wealth is not being passed down. He notes that, with many hourly workers, when they leave a job, they will automatically cash out of any savings program they have been using.

Stay to Play

By earning Salt, Lee makes the case that employees will not only be motivated to build the reward, similar to building points in a game, but to stay at the company to keep earning.

Salt is live with several employers now, Lee says, with plans to add more this year. His team, made up of 10 employees, shares statistics from early samples including: 71% of Salt users have higher tenure as compared to non-Salt users; 58% of users said they would apply for a job that offers Salt; and 90% of workers would pick up an extra shift if they could earn Salt.

Lee says the design of Salt Labs, along with his first firm, DailyPay, came in large part from spending time with hourly workers at places like check cashing stores, payday lenders, gas stations and big box retailer parking lots.

DailyPay is a software firm that provides on-demand pay for workers as they earn it. The firm started in Lee’s basement and grew to 1,000 employees with 5 million users; it is used by companies, including McDonald’s, Kroger, Target, Duracell and Calhoun Management, which operates Wendy’s.

Lee left DailyPay in mid-2022, though he continues to advise companies on immediate worker pay. In January, the firm announced a further $175 million funding round that valued the company at $1.75 billion on a pre-money basis.

Venture capital firm Fin Capital, which was an investor in DailyPay, also led the seed funding round for Salt Labs and was joined by Anthem Venture Partners.

“We know what low-income people want,” he says. “They do want to save; they do want to be financially healthy. The problem is none of the technology and none of the tools are built for them.”

 

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