Client Service September 14, 2016

PANC 2016: Lessons Learned From Litigation

Among all the highly informative breakout sessions at PLANADVISER National Conference, the most popular again this year includes the panel “Lessons Learned From Litigation.”
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Recent retirement plan lawsuits about investments, fees, administration and conflicts of interest create a vibrant curriculum of warnings for advisers and their clients to heed, according to experts leading a breakout session on Day 2 of the 2016 PLANADVISER National Conference.

Moderated by L. Rita Fiumara, senior vice president for investments and senior retirement plan consultant with UBS Institutional Retirement Group, the discussion featured two distinguished ERISA [Employee Retirement Income Security Act] attorneys and a consulting group director for a large plan-provider. All three were unanimous in their belief that the scope and intensity of retirement plan-focused litigation will only increase.

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“Clearly it’s not welcome news from advisers’ or plan sponsors’ perspective,” noted Christine Cushman, director of the advanced consulting group for Nationwide Retirement Plans, “but, nonetheless, the wave of litigation is almost certain to grow.” Cushmann observed that she used to practice law but has since come to focus on the consulting and delivery side of the business.

Alison Douglas, a partner with Goodwin Procter, outlined the various types of suits she has lately seen emerge in the retirement plan space. There has been a string of suits accusing mutual fund and recordkeeping providers of inappropriate self-dealing, essentially favoring their own services at the expense of plan performance. Plan sponsors’ lack of formal requests for proposals (RFPs) have been cited more and more, as well.

“Other plans are accused of the classic ‘failure to monitor’ claim, still having retail share classes in mutual funds, etc.,” added Doug Hinson, partner with Alston & Bird on the firm’s lead ERISA litigation group. “Others are facing lawsuits over use of custom target-date funds [TDFs] and alternatives within the default portion of the investment menu. What’s the trend here and how can sponsors stay protected?”

The panelists all hammered one common theme: Plans are basically being sued for a failure to leverage size and sophistication to get a great deal. In other words, anything short of a great deal in any part of the retirement plan can apparently get you sued these days. And as Douglas warned, “Even that might not be enough. There is no silver bullet for preventing all potential challenges, especially given the exuberance of plaintiffs’ attorneys eyeing this space. They are attracted to deep pockets, such as those you find operating in the ERISA industry.” 

NEXT: A few lessons learned 

“Getting more specific, these days I am still asked all the time, should plan sponsors just move to an all-passive lineup?” Douglas said. “My answer is ‘no.’ An automatic move to any particular lineup due to potential litigation is not a great idea. The plaintiffs’ bar is making a combined attack on performance and price. The question is, has a court bought the theory that only passive is suitable for tax-qualified retirement plans? Again the answer is no. Courts have been skeptical on this broad claim against active, per se.”

Hinson agreed, noting that elements of active management have been targeted in ERISA suits. “But so have many other practices. It’s clearly not just about having passive funds. And in fact, if you, as a plan fiduciary, decide to do something like that simply out of fear of litigation, you’re already committing a fiduciary breach. That’s not the way you’re supposed to make decisions under ERISA.”

Asked to consider some of the big-ticket examples of litigation being settled in the ERISA industry, the expert panelists observed that the main way big-dollar damages have been decided upon and awarded—at least as far as the excessive fee suits are concerned—relates to the difference in performance between underperforming (and in the plaintiff’s view, inappropriately expensive) funds and funds that a prudent fiduciary should have chosen.

“So in this sense, the plaintiffs’ bar gets to use hindsight when pushing for monetary settlements,” Hinson concluded. “They will demand the plan sponsors reimburse the amount of this performance gap directly to the plan, and we have seen this exact process play out in many of the settlements reported on recently. In terms of non-monetary concessions, they will also ask for the fiduciaries of the plan to limit the per-participant recordkeeping expense. That’s been a big deal with plaintiffs’ attorneys recently. I will say, however, that for the plaintiffs’ bar, it’s really all about the dollars, at the end of the day.”

Data & Research September 14, 2016

Research Finds Americans Seek Financial Advice but Lack Planning

Sixty-eight percent of American adults are not getting professional financial advice and of the ones who are, 43% say their “advisors don’t feel like long-term partners with a deep knowledge of their complete financial picture,” according to a new study. 
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New research by Northwestern Mutual indicates that only 20% of Americans feel “very confident” they would be able to achieve their financial goals, while 32% believe they lack a clear and accurate view of their whole financial picture. Two-thirds said their financial planning needs improvement, the study found.

Northwestern Mutual also found that Americans are “increasingly less confident that their savings will last them through retirement,” with two-thirds saying there is some chance they will outlive their savings. Fourteen percent of respondents said that scenario is definite, while one-third said the outcome has at least a 50% chance.

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However, the study found that only 21% of respondents are increasing their savings while 44% are doing nothing to “address the financial implications of living longer.” The firm notes that only 24% of Americans say it’s “extremely likely” that Social Security benefits would exist when they retire, and only 35% expect that Social Security will be their sole or primary source of retirement income compared to 49% of current retirees.

The study also found that Americans value financial planning. When asked which they valued more, 89% of respondents chose “a feeling of comfort from knowing I am financially secure for the long-term,” rather than “cash in hand today.” Thirty-five percent of Americans have not talked to anyone about retirement, and only 37% define financial planning as a strategy to “…allow me to live comfortably when I get older or retire.” Still, two in three acknowledged that their planning needs improvement. 

Moreover, 45% said they “do not know where to get the help they need as they move through life stages and need different financial solutions.”

The study found that 68% of U.S. adults are not getting professional financial advice. Of those who are getting advice, 43% of respondents say their “advisors don’t feel like long-term partners with a deep knowledge of their complete financial picture.” This is important to note considering the study found that 33% of respondents said they valued a human relationship “above all else” when receiving financial advice, and 55% said the ideal option for getting financial advice will be through a combination of technology and human support. 

NEXT: Financially Anxious America

Northwestern Mutual’s study found that 85% of Americans feel financially anxious today and 35% say their anxiety has gone up in the last three years with only 14% saying it has decreased. Twenty-eight percent worry about their finances every day, the survey found.

Northwestern Mutual notes “the levels to which financial anxiety is impacting all corners of people’s lives is extraordinary. The study found that 67% say it is negatively impacting their health, 70% say it is negatively impacting their happiness, 61% say it is negatively impacting their home life, 70% say it is negatively impacting their moods, 51% say it is negatively impacting their social life, 41% say it is negatively impacting their career, and 69% say it is negatively impacting their ability to pursue dreams, passions, and interests

When asked about the causes of this financial anxiety, 38% of respondents pointed to “having an unplanned financial emergency” and 34% said “having an unplanned medical expense due to an illness.” Only 17% cited the fear of losing their jobs as a top financial fear, the report stated.

Debt is also a major burden when it comes to financial planning, the study found. According to Northwestern Mutual, Mortgages are the leading source of debt with 29% citing it as a major source of financial pressure. Credit Card debt was cited by 23%, “exceeding student loan debt, car loans, and home equity loans/lines of credit combined,” the firm says.

When it comes to retirement, 45% of respondents cited healthcare costs as a major obstacle to financial security, outpacing planning at 30% and volatile markets at 22%.

NEXT: Looking Ahead

According to the Northwestern Mutual study, 60% of American adults said that “integrated solutions designed to both grow and protect their assets are most important to achieving financial security.” The study found that 45% of respondents have investments including stocks, bonds, mutual funds, Individual Retirement Accounts (IRAs), and Exchange Traded Funds (ETFs). However, only 27% have permanent life insurance, 26% have term life insurance, and 16% have annuities.

“Deepening awareness of their options is essential to helping Americans feel less vulnerable and more secure,” says Dave Simbro, senior vice president, life and annuity products. “For example, many don’t realize that permanent life insurance is the proverbial utility knife of financial solutions because it can be used to tackle a variety of financial objectives over the arc of their lifetime – from building a business and funding college to supplementing retirement income.”

“It’s much easier to navigate the path to financial security with your eyes wide open to all the realities you are facing. Like with any other situation, when you are uninformed it makes the process more challenging and intimidating.” 

Moreover, the study found that 66% of respondents felt the “American Dream” was within their grasp. The firm found that Americans’ definition of this ideal may be shifting “more toward outcomes like happiness and security rather than some traditional notions of the American Dream such as material wealth, opportunities to advance and moving up in social class.”

When asked about the most defining characteristics of the American Dream today, the top two answers were “having a happy family life” (59%), and “being financially secure” (58%).

More findings from the Planning and Progress Study by Northwestern Mutual can be found online here.

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