Compliance July 1, 2007

Exelon Fee Case Receives Class Action Status

Just days after the dismissal of a similar case in a different jurisdiction, a federal judge has agreed that an excessive fee suit against Exelon Corp. can move forward as a class action.
Reported by
U.S. District Judge John W. Darrah of the U.S. District Court for the Northern District of Illinois ruled that the five employees who brought the lawsuit were adequate representatives of the class because they say they have been hurt by Exelon’s retirement plan practices. Darrah said there could be more than 23,000 former, current, and future participants represented in the case, based on data in court documents.
Darrah claimed that future class members are often included in the group represented by a collective lawsuit and that it made sense to keep them in the Exelon class because plaintiffs were asking the court to not let Exelon continue with its current retirement plan policies.
The court also pointed out the 7th U.S. Circuit Court of Appeals had ruled in other cases that ex-workers had legal standing if they left the plan “at a smaller benefit than they were due.”
Darrah also asserted that the St. Louis law firm of Schlichter, Bogard & Denton was qualified to represent the interests of the class members. The Schlichter firm has been in the forefront of much of the current plan fee controversy, going after a number of large corporations in the courts over excessive fee and inadequate fee disclosure allegations.
The Exelon suit alleged that Exelon and fiduciaries of its 401(k) plan breached their Employee Retirement Income Security Act (ERISA) fiduciary duties by paying unreasonable fees and revenue sharing payments to providers such as T. Rowe Price and not adequately telling participants about the payments.
In February, the court threw out the employees’ request for recovery of “investment losses” allegedly incurred when the plan allowed its investment managers and service providers to charge unreasonable fees.
One court recently granted a plan sponsor victory with the dismissal of a suit against Deere & Co, and two units of Fidelity Investments (See Deere and Fidelity Fee Lawsuit Thrown Out). U.S. District Judge John Shabaz of the U.S. District Court for the Western District of Wisconsin contended that the defendants had followed current laws and regulations regarding retirement plan fee disclosures.
The Exelon case is Loomis v. Exelon Corp., N.D. Ill., No. 06 C 4900, 6/26/07.
Compliance July 1, 2007

DB Consultant Conflicts Are Often Unreported

A recent report from the Government Accountability Office (GAO) indicates conflicts-of-interest often exist for consultants to terminated or likely to be terminated defined benefit pension plans, but seldom are reported to government authorities or sponsors.
Reported by
The GAO said that, although no complete information exists about the presence of conflicts-of-interest at pension plan service providers, a 2005 Securities and Exchange Commission (SEC) examination of the activities of 24 pension consultants from 2002 through 2003 revealed that 13 failed to disclose significant ongoing conflicts-of-interest. SEC found that the 13 pension consultants or their affiliates had conflicts because they provided products and services to both pension plan clients and money managers or mutual funds without adequately disclosing these arrangements.
According to the report, the conflict is created because the pension consultant that might be more inclined to recommend to pension plans the money managers that buy consultant products because those business relationships are profitable for the consultant. As examples, the GAO said the SEC study found 10 pension consultants or their affiliates sold analytical software packages used to analyze and improve performance of client investments and 13 pension consultants hosted conferences attended free by pension plan advisory clients and attended by money managers for a fee. The GAO suggested these consultants would be more inclined to recommend these money managers to pension plan clients in order to keep the business.
The study also found the majority of pension consultants examined had business relationships with broker-dealers that raised a number of concerns about potential harm to pension plans, the GAO said. In certain directed brokerage arrangements, trades may be directed through a broker-dealer that was affiliated with the consultant as a means for paying fees a plan owed to its consultant using a portion of the brokerage commission. These arrangements raised concerns that plans might not have received the best price for each trade or best execution because the directions may have restricted the money manager’s ability to select a broker-dealer that was the best able to execute a trade. The report said the arrangements also raised the concern that consultants might be overpaid.
Other conflicts-of-interest mentioned by the GAO not necessarily related to advisers included plan loans for personal interests of plan fiduciaries, redirection of plan assets for business or personal uses, and plan decisions presented to trustees creating a conflict between participant interests and sponsor interests.
Using data from the SEC study, the GAO performed an analysis that indicated lower rates of return for plans associated with an adviser who failed to disclose conflicts-of-interest. The average return for plans using a consultant without disclosure violations was 4.5%, while the average return for plans using a consultant with disclosure violations was 3.2% to 3.3%, the report said.
The GAO pointed out that policies and procedures of the Pension Benefit Guaranty Corporation (PBGC) are not focused on identifying conflicts-of-interest, and while enforcement procedures of the Employee Benefits Security Administration (EBSA) address conflicts for all private pension plans, they do not explicitly address conflicts for plans trusteed by or likely to be trusteed by the PBGC.
A New Initiative
The GAO announced in its report that the EBSA has initiated a new enforcement project known as the Consultant/Adviser Project (CAP), mainly focused on issues identified in the SEC’s 2005 study of pension consultants. Through the project, EBSA also hopes to identify other service providers that may be using or managing plan assets for personal benefit.
Specifically the agency will look for improper, undisclosed compensation such as kickbacks, pay-to-play arrangements, and soft dollar arrangements, the GAO said.
In addition, to acquire more information about the fees charged by service providers, the EBSA, IRS, and PBGC recently proposed several revisions to the Form 5500. Among the many changes, the revised form would require increased disclosure regarding the types and amounts of payments made to service providers, including amounts paid via third-party arrangements, both direct and indirect, the GAO report said.
The GAO report is here.

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