Compliance June 8, 2021

When ‘Eating Your Own Cooking’ Becomes Self-Dealing

One conclusion that can be drawn from the rash of self-dealing lawsuits filed in the retirement plan services industry is that providers must be just as diligent as their clients when it comes to prudently and loyally delivering workplace retirement benefits—perhaps even more so.
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News broke this week that John Hancock has agreed to settle a self-dealing lawsuit filed against the fiduciaries of its own retirement plan, making it the latest, but by no means the first or last, retirement plan service provider to do so.

In this case, the settlement agreement includes a $14 million payment to the retirement plan in question, alongside various nonmonetary elements of relief that the plaintiffs say will improve the plan’s oversight and operation. Among these is a commitment to retain an independent third-party investment consultant to provide ongoing monitoring and review of the investment options in the plan’s investment lineup for at least five years from the settlement effective date. In the settlement agreement, the company also agrees to use the services of an independent consultant to assist with negotiating the next recordkeeping agreement and to issue a request for information (RFI) for recordkeeping services at or before the expiration of the plan’s current recordkeeping contract.

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While some financial services firms have successfully defeated similarly structured lawsuits—for example, Morgan Stanley back in October 2019—others have either seen their summary dismissal claims rejected, or they have already reached settlements that closely resemble this one.

Indeed, just last month, a federal district court judge moved forward a lawsuit alleging that Wells Fargo 401(k) plan fiduciaries should have been able to obtain superior investment products at a very low cost but instead chose proprietary products, for their own benefit, increasing fee revenue for the company and providing seed money to newly created Wells Fargo funds.

Prior to that, a judge dismissed dueling dismissal motions in a self-dealing lawsuit targeting BlackRock. While not an outright defeat for the firm, the ruling stated there were genuine disputes of material facts that made summary judgment, whether in favor of the plaintiffs or the defense, inappropriate. That development opened up the door for a lengthy and potentially expensive discovery process, which in turn led BlackRock to settle the suit to the tune of nearly $10 million, though, like the other aforementioned providers, it admitted no wrongdoing.

Many Lawsuits, Little Clarity

Suffice to say, the legal picture remains murky when it comes to the use of proprietary products within investment service providers’ own retirement plans. On the one hand, providers might feel like they have to use their own products, or “eat their own cooking,” to prove they believe in them. Alternatively, regulators and litigators are watching closely for any breaches of their fiduciary duties. Attorneys who are experts on the Employee Retirement Income Security Act (ERISA) say this situation makes sense, given that the broader ERISA litigation landscape is also very murky.

Simply put, so many cases have been filed in such a short amount of time—across the entire federal court system—that there is not yet sufficient case law and/or appellate precedent to clarify the thorny questions and allegations underpinning the self-dealing lawsuits. The same can be said about the other broad classes of ERISA litigation, such as excessive fee lawsuits or suits questioning the use of revenue sharing and active management.

As Charles Field, partner and co-chair of Sanford Heisler Sharp’s Financial Services Litigation Practice Group in San Diego, recently told PLANSPONSOR, under the ERISA duty of loyalty, all employers must act solely in the interest of participants. They must act for the exclusive purpose of providing benefits to participants and defraying reasonable expenses when administering their plan. This is true no matter what industry the plan sponsor operates in—from financial services to farming to fabrication.

“While a fiduciary is not required to get the absolute best performance, investment options that consistently underperform their benchmarks and peers over an extended period of time expose fiduciaries to claims that their process is tainted by a failure of effort or competency,” Field says.

Standing Up to Scrutiny

Echoing other ERISA attorneys, Field says the prudence of the process is what matters most. Short of failing based on more technical or procedural pleading errors, the ability of a given ERISA lawsuit to get past the motion-to-dismiss stage is largely tied to whether the plaintiffs can sufficiently allege (not necessarily prove) a faulty process was in place.

When it comes to self-dealing lawsuits, plaintiffs will often do this by demonstrating that an investment committee had a stated, formal process in place to review and remove funds that underperform a benchmark for a predefined period of time. They will then compare this process and time frame with the actual actions taken by the committee, alleging that an underperforming fund has been retained far beyond the period stated in the plan’s investment policy. In this sense, whether a fund in question is a product of the employer itself is almost beside the point.

Speaking on the subject of prudence and loyalty on a recent PLANSPONSOR webcast, Lars Golumbic, principal at Groom Law Group, and Kim Jones, partner and co-leader of the ERISA litigation team at Faegre Drinker, emphasized the importance of process and documentation when it comes to defending against ERISA fiduciary breach claims of all types.

“Plan sponsors should be able to show that they documented their decisions and committee meeting minutes, which will help support a defense,” Golumbic said.

Jones stressed the importance of a retirement plan committee member’s oversight role, noting that members should not blindly agree to plan decisions. To mitigate this, she recommended that committee members receive quarterly reports about the plan’s performance ahead of time, so they have enough time to think through options and to potentially raise red flags.

While ERISA does not require them, conducting regular RFIs and more formal requests for proposals (RFPs) could be an indication that employers are taking action to pay appropriate recordkeeper, adviser and investment fees. Jones recommended employers conduct RFIs and RFPs periodically, about every three to five years. Given the extra scrutiny being paid to the investment menus of financial services firms, this may be especially important for asset managers, insurers and recordkeepers moving forward.

Practice Management June 4, 2021

The CFP Board to Include the Psychology of Financial Planning in Its Certification Exam

The aim of expanding the training to include more people skills is to help advisers align more closely with their clients’ goals.
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Beginning next March, the examination for the Certified Financial Planner (CFP) Board of Standards designation will include questions on the psychology of financial planning.

The change was made because the CFP Board updates its Principal Knowledge Topics every five years to “ensure the CFP certification requirements reflect current practices—i.e., what CFP professionals actually do,” says John Loper, the board’s managing director, professional practice (education, examination and experience). The update, the last one being in 2015, was the result of “a major research project,” Loper tells PLANADVISER. “We survey CFP professionals with different experience across the country to learn how important each of the principal knowledge topics are. Those results showed us that we needed to update our certification to give the psychology of financial planning—which was already part of principal knowledge topics under general principles—greater importance. If we were static, we would not be reflecting current CFP practices.”

To prepare those financial advisers who are currently studying for the CFP designation, Loper says, this past March, the CFP Board “announced the full principal topics across the domain to everyone,” including this change. “Registered programs need to know because they provide the education to CFP candidates,” Loper says.

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The CFP designation can be obtained through a four-year Bachelor of Arts (BA) degree, which is the route most CFPs take, or as a certificate, which typically takes 18 months to two years of study, Loper says.

The Value of the ‘Psychology of Financial Planning’

As many retirement plan advisers and general financial planning practitioners may already know, the work that a financial adviser does with a client is very personal and needs to address the person’s financial goals.

The CFP’s psychology of financial planning curriculum addresses “client and planner attitudes, as well as behavioral finance,” Loper says. For instance, “Clients who are socially conscious may not want their investments to be in tobacco or companies that are not environmentally conscious,” Loper says. Understanding these types of clients’ financial priorities and goals is important to a financial planner, he says. “There could be sources of money conflict arising from a divorce or crisis events with severe consequences.” Further, it’s important for CFPs to know how to “work with clients when there is a severe correction in the market,” Loper continues.

Advisers need to know how to address client worries during such events, he says. “One of the most obvious skills an adviser needs is effective communication. If you’re a poor communicator, you will have trouble giving advice to your clients. Many of our volunteers have shared with us that it’s exciting” to have the CFP designation updated to include more modules on the psychology of financial planning, Loper says. “These are critical skills, not ‘nice-to-have’ skills,” he says, adding that the CFP Board expects reaction to the new CFP requirements to be “very positive.”

“This should especially help new planners communicate better with their clients,” Loper says. For those who already have the CFP designation, they’ll have the option to take the psychology of financial planning classes in the 30 hours of continuing education (CE) they must undergo every two years, he says. “They can choose from any principal knowledge topic—but two credits must be associated with ethics.”

EY Personal Finance has long addressed the need for financial planners to understand the value of the psychology of financial planning, says Dan Eck, managing director of the firm.

“This is part of the conversations we have every day in our financial planning life,” Eck says.

In preparation for that work, EY Personal Finance puts its financial planners through a “softer-training boot camp,” Eck says. The update to the CFP Board of Standard’s certification “is exactly what we’re talking about—helping our planners build trust [and] empathy and learning the reasons behind a person’s stated goals and philosophy toward money. There is a lot behind saying you want to retire. You need to consider the spouse, or the significant other, and the motivation behind any goal. That’s a key part of the financial process. Learning about some of these motivations is easy and obvious, but whatever the motivation might be, learning about and understanding them is a critical part of financial planning.”

Examples of Psychology of Financial Planning in Use

When Eck first studied for the CFP in the late 1990s, one of his instructors asked the class what a financial planner should advise a client to do if approaching retirement with a mortgage. The instructor asked if it would be better for the client to pay off the mortgage before retiring.

“None of us came up with the right answer, which is [another] question: ‘What does the client want to do? Is their life goal to be debt free in retirement?’”

Another example of the psychology of financial planning in play is helping retirees decide on a budget, as many have difficulty spending and enjoying the money they worked so hard to save for three or four decades, Eck says.

Then there is the critical question of what to say to clients when the market fluctuates dramatically. It is important for planners to be prepare to “talk panicked investors off the ledge by helping them understand and focus on the long-term,” he says.

Eck even encountered people on the cusp of suicide during COVID-19 due to unforeseen financial difficulties the pandemic wrought.

EY Personal Finance planners coach workers who call “each and every day with the issues that come with the stress of finances.”

For example, when an EY Personal Finance planner first encounters a new caller asking about retirement, the planner “devotes the first hour to asking them about their picture of retirement. It has nothing to do with finances—but how they and their family are planning to live. It goes well beyond the numbers,” Eck says.

He notes that retirement planning advisers could well employ the psychology of financial planning in their one-on-one encounters with retirement plan participants. As he puts it, “The psychology of financial planning drives how and why we crunch the numbers.”

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