Compliance September 18, 2013

PANC 2013: Staying Out of Trouble – Part I

Ever since the Enron scandal of 2001, Employee Retirement Income Security Act (ERISA) attorneys have become “exploitive” with regards to bringing lawsuits against defined contribution (DC) plans.

 
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 Ever since the Enron scandal of 2001, Employee Retirement Income Security Act (ERISA) attorneys have become “exploitive” with regards to bringing lawsuits against defined contribution (DC) plans.

This was the warning of James Fleckner, partner with Goodwin Procter LLP, speaking at the PLANADVISER National Conference in Orlando, Florida, in a session titled “Staying Out of Trouble – Part I. Trends in litigation and best practices to avoid lawsuits.”

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Indeed, in a polling of audience members, 52% said they were “somewhat concerned” that litigation could be brought against them or their clients, and 17% said they were “very concerned.” Another 29% said they were “not very concerned,” and only 2% said they were “not at all concerned.”

“There has been a real uptick in DC litigation in the past five to 10 years,” Fleckner said. “There hasn’t been much DB [defined benefit] litigation, so long as plans are solvent and employers make up any shortfalls. But in DC plans, all of the risk falls on the plate of participants. However, if you do a good job and participants get good quality products at reasonable prices, litigation likelihood is lower.”

Courts’ main focus is whether the person or entity being sued is a fiduciary, Fleckner said. “Fiduciaries under ERISA federal law have the obligation of prudence, loyalty and not committing prohibitive transactions,” he said. In many cases, “plaintiffs are trying to get courts to rule they are a 3(21) fiduciary kin that they give discretionary or investment advice, and are a functioning fiduciary,” Fleckner said. Other cases hinge on performance or fees, he added.

Retirement plan advisers can protect themselves from such lawsuits by “expressly writing in their contracts that they are not a fiduciary,” Fleckner suggested. “They would be very helpful in the event of a suit. That would go a long way to help with any liabilities.”

Those retirement plan advisers who decide to act as either a 3(38) or a 3(21) fiduciary must document a process that shows how they came to a plan or investment decision, he said, “that you evaluated alternatives, had reason to evaluate those alternatives, and gave the reason for your decision—be it fees, investment choice or mapping a QDIA [qualified default investment alternative]. That documented process will go a long way to throw out a case, because the courts don’t want to second-guess the market or fiduciaries.”

Don’t be lulled into complacency, Fleckner said. “Plaintiffs’ lawyers are getting very creative and expansive,” he said. “Some were asbestos or railroad lawyers. They see $4 trillion in 401(k) assets and see opportunities, so be very conscientious as to how you present information.”

Compliance September 17, 2013

PANC 2013: Fee Disclosures

Fee disclosure is not something to fear but “an opportunity to differentiate yourself as a retirement-focused practice,” said Vincent Morris, president of Bukaty Companies Retirement Plan Services, at the PLANADVISER National Conference in Orlando, Florida.
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“The law says that you have to do this, so we all did it,” said Michael Perry, president of Retirement Advisors LLC. “Was it good for the industry?”

Panelists agreed that fee disclosure affected plan sponsors and participants differently. “At the plan sponsor level, fee disclosure was very good for the industry,” said Morris, adding that it was likely an exercise in futility at the participant level. “But there are still lots of plan sponsors that we run across that are being overcharged for poor services or even plans that were orphaned by a broker. I think it shed some light on those scenarios.”

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A member of the audience pointed out that while she has been forthcoming about her fees as an adviser, she felt that the recordkeeper fee is often embedded in the 12b-1 at the fund level and partially covered by revenue sharing. The plan sponsor does not see what the recordkeeping fee is, she said, and asked panelists how they would make sure clients see fees on an apples-to-apples basis.

“Since 2007, recordkeepers have spent a great deal of time and money on those 408(b)(2) notices,” Perry said, noting that as a relatively experienced provider in the industry, he has also had trouble understanding what fees are being charged, for what services.

“There’s not an apples-to-apples comparison,” Morris said, and different providers can outline very different costs. Two advisers competing for the same business might produce quite different proposals. “Part of the value you can bring to a plan is to shed some light on fees,” he said. Advisers can also help a plan sponsor to negotiate with a vendor.

Value Proposition

Fee disclosures can be part of an adviser’s value proposition, said Henry Yoshida, principal of The Maresh Yoshida 401k Group. Fee disclosure has helped plan sponsors understand that a plan is not free and that recordkeeping costs come with sponsoring the plan.

When designing their disclosure format, The Maresh Yoshida 401k Group built in additional services that could be billed on the back end, Yoshida said, to address unique situations. “We further defined fiduciary versus non-fiduciary services on the advice of our counsel,” he added.

Morris detailed his firm’s process for sending new notices to clients last March. “We changed our contract and re-papered everyone this year,” he explained. “This is something fee disclosure can’t help with. You can look at itemized costs. If it’s truly about costs, it takes fees out of the equation and lets you look at itemized costs for services like benchmarking.”

Outside counsel reviewed contracts and a separate disclosure, Morris said. “We created 408(b)(2) discovery to clients, which directed them to a schedule in the contract, which broke out services and what our compensation would be, and language for non-monetary cash compensation.”

The firm has a base rate for their retainer and a section for additional services. “If someone needs help with a DOL [Department of Labor] audit, we have the right to bill for that. This way, we were able to take some of our plans to a profitable status.”

Standardization in fee disclosure still needs clarification, Yoshida said. The guidelines for disclosures have been given, and retirement plan providers have the freedom to create their own forms. “A significant improvement would be a standardized structure,” Yoshida said.

“That’s part of the value proposition,” Yoshida said. “Until there is a standardized template, it’s up to us to create a simple format to disclose fees.” 

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