Compliance January 31, 2017

Kickback Lawsuit Calls Out Aon Hewitt Agreement With Financial Engines

Plaintiffs from the Caterpillar retirement plan feel the price paid for advice was too high and was not transparently tied to the level of service delivered. 
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The latest example of Employee Retirement Income Security Act (ERISA) industry litigation targets Aon Hewitt for, in the words of plaintiffs, permitting excessive fees to be paid and then taking kickbacks.

The challenge was filed in the United States District Court for the Northern District of Illinois, Eastern Division. Lead plaintiff Cheryl Scott commenced the action on behalf of herself and similarly situated participants in the Caterpillar 401(k) Retirement Plan. Named as defendants are a number of Aon Hewitt companies, including Aon Hewitt Financial Advisors, Hewitt Financial Services and Hewitt Associates.

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According to the text of the complaint, Scott is a retiree and a participant in the Caterpillar plan, while defendant Hewitt Associates serves and has served as the recordkeeper. Another provider, Financial Engines, is also named in the text of the suit but is not actually challenged as a defendant.

The central claims in the proposed class action suggest plaintiffs feel they overpaid significantly for the services provided by Financial Engines, with the excess payments essentially amounting to kickbacks returned to defendant Hewitt.

As the text of the lawsuit lays out, “Scott and the other plan participants who signed up for the service received advice from the third-party firm Financial Engines Advisors. For periods prior to 2014, Financial Engines provided services directly to plaintiff and other Caterpillar plan participants and was paid directly from participants’ accounts. But the fee for those services was significantly higher than it should have been because the agreement between defendants and Financial Engines required Financial Engines to kick back to defendant Hewitt a significant percentage of the fees charged by Financial Engines, even though Hewitt and its sister company co-defendants did not perform any investment advisory or other material services in exchange for the payment they received.”

According to the complaint, such a payment-sharing arrangement violates federal laws designed to protect retirees.

The text of the suit further suggests changes made to the plan in recent years were not enough to ensure participants were getting a good deal: “In 2014, the business arrangement between defendants and Financial Engines was restructured and re-branded so that defendant Aon Hewitt Financial Advisors, ostensibly providing the investment advice services to plaintiff and other Caterpillar plan participants, directly charged to participants’ accounts the fees for those services. But the re-branding of those services was cosmetic only, and, through a sub-advisory agreement between [Aon Hewitt Financial Advisors] and Financial Engines, all of the investment advice services provided to plaintiff and other Caterpillar plan participants continued to be provided by Financial Engines … Importantly, the financial arrangement between defendants and Financial Engines did not change.”

Plaintiffs boldly go on to state that even after the change, Aon Hewitt knowingly charged the “same excessive fee that had previously been charged by Financial Engines, kept the same amount that had previously been kicked back to defendants by Financial Engines, and paid the balance of the fee to Financial Engines … From all that appears, the principal, if not the only, reason for the re-branding of the service was to conceal the illegal kick-back.”

NEXT: More context from the suit 

A short fee schedule included in the text of the complaint shows the fees charged by Financial Engines under the initial arrangement went as follows: An account balance up to $100,000 brought a 0.40% of assets fee; a balance of $100,000.01 to $250,000.00 brought a 0.30% of assets fee; and $250,000.01 or more would see an annual fee of 0.20% of assets.

“At no time during the period when Financial Engines was providing investment advice directly to Caterpillar plan participants did Hewitt directly notify Ms. Scott or other similarly-situated plan participants that Hewitt was taking a 20% to 25% kickback on the amounts paid to Financial Engines for ‘managed services.’ Yet, the required Annual Report of Employee Benefit Plan filing that the Caterpillar plan submitted to the United States Department of Labor for 2013 clearly shows that Hewitt was receiving 25% of the advice fee paid and 20% to 25% of the managed account fee paid to Financial Engines,” the complaint states. 

“On information and belief, the Hewitt defendants recognized that this kickback information was at-risk of being discovered through the required public disclosures that were increasingly becoming available in on-line repositories, as opposed to paper filings that were historically difficult to access,” plaintiffs claim. This risk was, they suggest, what drove the aforementioned “cosmetic changes” made to the advisory arrangement.

Plaintiffs suggest that, beginning in 2014, the Hewitt defendants and Financial Engines “changed the structure of their arrangement to hide from public scrutiny the kickback fees that Hewitt was receiving from Financial Engines … In or around that time, although it was Financial Engines that continued to perform the advisory services to Ms. Scott and similarly-situated participants in the plans, including the Caterpillar Plan, Hewitt’s newly incorporated sister company, Aon Hewitt Financial Advisers [AFA], purportedly became the entity that would provide the plans with advisory services. Yet, in reality—and for all intents and purposes—Financial Engines continued to do all the actual work related to the investment advisory services that Ms. Scott and similarly-situated participants in the plans were receiving.”

The claim is based on language taken from plan disclosures, which reads, “AFA has hired Financial Engines Advisors LLC to provide sub-advisory services. We rely exclusively on the proprietary software systems and methodology developed and maintained by Financial Engines Advisors LLC, an SEC [Securities and Exchange Commission]-registered investment advisor, which is unaffiliated with AFA or any of our affiliated companies, to create target allocations for participants.

“By having the Plans’ sponsors hire AFA in lieu of Financial Engines, and then having AFA enter into a sub-advisory agreement with Financial Engines, whereby Financial Engines performed all the relevant work for Ms. Scott and the similarly-situated plan participants, the Hewitt defendants were no longer required to report the fees they received from Financial Engines,” the complaint concludes. “Instead, AFA simply skimmed 20% to 25% off that fee for the Hewitt defendants and paid the balance to Financial Engines as a sub-advisory fee.”

Asked for comment, Aon Hewitt promptly replied that it has a policy not to discuss ongoing litigation: “We have an unwavering commitment to fee transparency and independent and unbiased retirement and financial wellness solutions. Our model has always been and will continue to be fully transparent about all sources of revenue and fees we receive, so that plan sponsors and plan participants fully understand the cost of their plans.”

The full text of the complaint is here. 

Compliance January 31, 2017

Agencies Say Church Plan Interpretation Deserves Deference

“If there were any doubt about the best interpretation of the church-plan definition, it would be resolved by the position adopted and consistently applied by the IRS, DOL, and PBGC,” counsel for the agencies state in an amicus curiae brief filed with the Supreme Court.
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A group of attorneys representing the Department of Justice, the Treasury Department, the Internal Revenue Service (IRS), the Department of Labor (DOL) and the Pension Benefit Guaranty Corporation (PBGC) filed a brief for amicus curiae in the U.S. Supreme Court supporting health care organizations that have had their pension plans’ church plan status under the Employee Retirement Income Security Act (ERISA) challenged.

The brief notes that, prior to 1980, a broad coalition of religious organizations formed the Church Alliance for the Clarification of ERISA (Church Alliance) to seek changes to the original church-plan exemption. Among other things, the Church Alliance opposed the sunset of the temporary rule allowing church plans to cover the employees of church agencies. It also argued that the original definition’s focus on plans established and maintained by “churches” favored hierarchical denominations over congregational denominations, which typically relied on separate pension boards to administer the plans covering the employees of local churches and church agencies. 

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In addition, the Church Alliance opposed government inquiries aimed at determining whether particular entities were sufficiently religious to qualify as “churches” entitled to establish and maintain exempt plans.

According to the brief, Congress responded to those concerns by substantially expanding ERISA’s church-plan exemption in the Multiemployer Pension Plan Amendments Act of 1980 (MPPAA). The agencies note that the MPPAA amendments preserved the core of the original definition, continuing to provide that “[t]he term ‘church plan’ means a plan established and maintained for its employees (or their beneficiaries) by a church.” But Congress broadened the exemption by adopting provisions deeming additional plans to satisfy that definition even though they did not fall within its literal terms.

The brief notes that Congress specified that, for purposes of the church-plan definition, “[t]he term employee of a church includes an employee of an organization, whether a civil law corporation or otherwise, which is exempt from tax under [26 U.S.C. 501] and which is controlled by or associated with a church.”  A separate provision provides that “[a] church shall be deemed the employer of any individual included as an employee” under that rule. The brief says those provisions allow “a church plan to cover employees of a tax-exempt agency controlled by or affiliated with a church,” such as a religious hospital. 

The brief also notes that Congress addressed the concerns of congregational denominations by specifying that “[a] plan established and maintained for its employees (or their beneficiaries) by a church”—that is, a church plan—“includes a plan maintained by an organization, whether a civil law corporation or otherwise, the principal purpose or function of which is the administration or funding of a plan for the employees of a church if such organization is controlled by or associated with a church.”  The agencies say that under that provision, a plan maintained by a church-affiliated pension board or other “principal-purpose” organization is deemed to be a church plan.

NEXT: Deference to longstanding interpretation

The brief further states that the IRS concluded that a plan may qualify as a church plan under the MPPAA amendments if it is either “established and maintained by a church,” or “maintained” by a principal-purpose organization. The IRS therefore determined that, although the orders’ plans had not been established by a church, they would qualify as church plans so long as they were maintained by principal-purpose organizations.

In the decades since, the IRS has issued hundreds of private letter rulings confirming the exempt status of particular plans based on its conclusion that a plan maintained by a principal-purpose organization need not be “established” by a church to qualify as a church plan. The brief notes that the DOL has likewise concluded that the identical definition in Title I of ERISA does not require a church to establish a church plan in the first instance.

“If there were any doubt about the best interpretation of the church-plan definition, it would be resolved by the position adopted and consistently applied by the IRS, DOL, and PBGC,” the brief states.

The agencies argue that their longstanding interpretation reflects the natural reading of the statutory text, and they argue their interpretation warrants deference under Skidmore v. Swift & Co. Under Skidmore, the court found the weight due to such an administrative construction “depend[s] upon the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control.”

The agencies contend the courts of appeals in the three cases identified no sound reason to upset decades of reliance on the agencies’ longstanding interpretation by imposing a church-establishment requirement. The courts of appeals appeared to believe that requiring a church to “establish” a church plan would ensure that the church retained control of or financial responsibility for the plan, the brief says. “Even if that were correct, the courts’ apparent view that an ERISA exemption should be conditioned on continuing church involvement would not justify the imposition of a requirement that Congress omitted from the statute. And in any event, requiring a church to establish a plan in the first instance would not guarantee such an ongoing role,” counsel for the agencies wrote in the brief.

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