Plaintiff Lawyers Can Now Use AI To Identify Potential Plan Issues

Tech and legal firm Darrow uses AI as a tool for ERISA lawsuit allegations such as underperforming plans, excessive fees.

Artificial intelligence “is not revolutionary, it is evolutionary,” says David Levine, a principal and ERISA defense attorney with the Groom Law Group, when it comes to ERISA plaintiff attorneys bringing lawsuits against qualified retirement plans.

Darrow AI, an AI legal services provider, hosted a webinar focused on the Employee Retirement Income Security Act on June 18 explaining AI’s role in this emerging space. During that session, Shai Silbermann, a legal data specialist at Darrow, explained that AI can be used to help identify funds that underperform in plans more efficiently than humans can.

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Many funds in retirement plans “are often not monitored,” by fiduciaries, Silbermann said, and AI can help lawyers identify such funds without having to manually go through plan Form 5500s.

Silbermann explained that their “algorithm highlights the worst underperformers” and can help identify “what plans underperform, by how much and for how long.”

Attorney Levine, who often represents fiduciary defendants, says that the use of AI in this field of law is relatively new, but its use is “very much a data processing tool,” and little else. Fiduciaries should generally follow the same principles as before, he says, but since AI models tend to focus on data procured from Form 5500s, sponsors should consider evaluating their Form 5500 reporting to be sure everything is accurate.

A blog post published by Darrow elaborates on how the firm uses AI to identify potential plan flaws.

“By combining every plan’s data from the past several years, we prioritized leads with the potential for the largest and most egregious damages,” Darrow’s blog reads. “This approach allowed us to identify dozens of highly probable violations and compare recordkeeping and other fees paid by plans of a similar size, highlighting the administrators’ imprudence. Furthermore, to emphasize the severity of the violations, we compare the amount the specific recordkeeper usually charges for plans of a similar size.”

The post also argued that “It has frequently been argued in court that charging $25-$35 per participant for the administration of a pension plan is considered reasonable, and thus charging above this amount could be considered excessive fees.”

Levine takes issue with the range, saying that: “There is absolutely nothing in ERISA that says the reasonable range is $25-$35.”

He adds that this view on fees and costs “disregards level of services, level of support, call center times, a myriad of factors,” that could justify higher fees. These services and their providers are “not interchangeable widgets.”

Darrow was founded in 2020 and is being used by more than 300 attorneys, according to its website. The firm notes more than $10 billion in claimed damages from attorneys using its services.

NEPC Looks at ROI of Managed Account Savings Advice

In a new white paper, the consultancy walks through the benefit versus cost of personalized savings advice from defined contribution managed accounts for early to mid-career savers.

Consultancy NEPC’s defined contribution team argued in a white paper released Monday that the return on investment from one-time savings advice for early to mid-career participants in a managed account will not offset the ongoing fees. Instead, the firm advocates for plan sponsors to consider automatic escalation as a way to boost savings outcomes for participants.

The firm’s DC team, which has shown caution about managed accounts in the past, published its findings in a paper titled “The Real ROI: Analyzing Savings Advice in Managed Accounts.” In the analysis, the consultancy considers the value of one-time savings advice used at the start of investing by an early to mid-career participant in a managed account with an ongoing fee of 30 basis points, or 0.30%.

The team writes that the “bulk of savings advice benefit for a participant materializes in the first year (and is further augmented by the annual compounded market returns on those savings).” After that first year, it assumes the primary driver for continued growth is “limited to any merit increases in pay.”

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The firm undertook the paper, in part, as it works with plan sponsor clients who are at times “getting pushed to add this feature,” says Mikaylee O’Connor, principal, head of defined contribution solutions at NEPC.

“What we’ve seen is that plan sponsors have over time added this service without necessarily going through the full due diligence process,” she says. “As part of our fiduciary duty in working with clients, we’ve spent time over the last number of years looking into managed accounts and really trying to understand the value add.”

O’Connor joined NEPC in April as Bill Ryan was promoted to DC team leader.

Proponents of managed accounts in DC plans have argued that the investment and ongoing advice solutions provide personalized attention at a lower cost than working with an individual financial adviser. In recent years, providers and recordkeepers have also been bringing to market dynamic, or hybrid managed accounts that flip participants into them when closer to retirement, when they have more to manage and need more help.

In a piece published earlier this year in PLANADVISER in response to a Wall Street Journal article about managed accounts, Steve McCoy, the CEO of managed account provider iJoin, rebutted arguments that fees are too high for managed account services. He made the case that fees are as low as 10 basis points by some providers, and that the investment benefits they offer are best compared to actively managed TDFs.

Seeking Personalization

In separate research published by Vanguard on Monday, the firm noted that 43% of plan sponsors offer a managed account program—a figure that rises to 80% for plans with over 5,000 participants. The firm also noted that 7% of participants use a managed account, as compared to 58% who are invested in a target-date fund.

O’Connor agrees that plan sponsors often want to offer more personalized solutions to participants. But she urged them to think carefully about how best to personalize.

“I think for some who are approaching retirement who have multiple pools of money and want to think about their overall financial picture, they may be a good candidate for some sort of personalized service,” she said. “But for the vast majority of people, I just don’t think that is going to happen; and we see that with managed accounts, people are not engaging with the service as they should be.”

In its paper, NEPC looked at four participant models with varying starting salaries and DC balances. It assumed that each participant received a 2% increase in savings from the managed account advice in the first year, and subsequently each year after without any further advice.

A participant making $50,000 a year would, for example, save an additional $1,000 in the first year. However, after that initial boost, additional savings would come from annual merit increases and market returns on savings; those would be substantially less, in a range of $80 to $95 a year.

“The reason for the negative ROI is that the managed account fee was based on the participant’s DC assets,” NEPC’s team writes. “As the participant’s assets grew faster than their salary, the incremental year-over-year rise in fees was greater than the incremental year-over-year increase in the participant’s salary, and therefore savings. This was especially true for participants younger than age 40 whose managed account investment allocation would have high exposure to equities, similar to a target-date fund.”

Due to these “diminishing returns” from the savings advice, NEPC makes the case for a different fee structure. In its proposal, the firm would have “savings advice should be a one-time charge” with subsequent fees being reduced.

Automatic Escalation

O’Connor went on to say that, in such a model, a managed account could offer a more a la carte service, in which a participant could opt-in for additional services.

“It can be on the participant to say I’m willing to pay something additional, which is a much better model than having everyone pay the higher fee,” she says.

NEPC then compared the results of a plan sponsor implementing automatic escalation for plan participants.

In one example, the firm considered a plan that auto-escalates at 1% annually up to a 10% ceiling, which would create an estimated compound growth in DC assets by over 14% after 15 years. It put a participant in that plan after being in a managed account and found that “this participant gains more value from auto-escalation than from the savings advice provided through managed accounts.”

In the separate Vanguard research, it found that 69% of plan sponsor clients use automatic savings rate increases.

“A plan sponsor could help almost their entire population by increasing their savings rates for free by just implementing auto-escalation,” O’Connor says. “You’re really putting people on a good path without them paying for it.”

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