Data & Research November 5, 2024

RIA Sector Hits Record M&A Activity in October

Meanwhile, private equity dominance continues, according to DeVoe & Co.

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Registered investment advisers set a new monthly record for mergers and acquisitions in October, in part based on the lower cost of capital, according to DeVoe & Co., an M&A consultancy that has been tracking such deals for 20 years.

With 39 RIA transactions recorded, the volume surpassed the previous high of 33 transactions in January 2021 and nearly doubled the 21 deals announced in October 2023. The year-to-date RIA M&A volume has risen by 12% through November 1, with 232 transactions completed in 2024, up from 208 at this point last year.

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David DeVoe, founder and CEO of DeVoe, stated that the sharp increase in October M&A activity follows nearly three years of stable levels, with the 65 transactions completed in this year’s third quarter matching the typical range since early 2021.

“The surge in October’s RIA M&A activity is a conspicuous spike following nearly three years of unremarkable activity,” DeVoe said in a statement.

He added that recent predictions about rising private equity buyer interest, driven by anticipated rate cuts, likely played into the acceleration. In October, 83% of deals were executed by private equity or PE-backed acquirers, an increase from the 70% norm seen over recent years.

Based on the “Q3 2024 DeVoe Deal Book,” private equity-backed firms are expected to continue dominating the RIA space as the cost of capital falls, enabling these firms to act more aggressively.

With the cost of capital decreasing and debt service ratios improving, these firms will have more confidence to deploy capital, the report explained, noting that these consolidators—firms focusing on growth through acquisition—comprised almost 50% of October’s transactions.

The Federal Reserve lowered the target range for the federal funds rate in September, and markets are forecasting another cut this Thursday.

Beacon Pointe, Cerity Partners and Waverly Advisors led the charge in October with three acquisitions each, a rare level of activity for single firms in a month.

M&A among retirement plan advisories has also been strong throughout 2024, according to a recent report by consultancy Marshberry. That firm reported 20 deals involving retirement advisories in 2024 through October, some of which operate as RIAs.

The DeVoe “RIA M&A Deal Book” tracks M&A trends for RIAs with assets under management of at least $100 million.

Compliance November 5, 2024

Clorox Wins 1st Round in 401(k) Plan Forfeiture Lawsuit

A federal judge called the plaintiff’s claims ‘impermissibly broad,’ but gave the plaintiff a chance to submit a revised complaint.

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A former Clorox Co. employee’s class action complaint over the company’s handling of forfeited 401(k) funds was mostly dismissed, with U.S. District Judge Yvonne Gonzalez Rogers ruling the breach claim under ERISA was “impermissibly broad” in a court document filed November 1.

Rogers gave the plaintiff, James McManus, until November 12 to file a revised complaint, asking for more specific details about the Clorox plan’s circumstances to support his claims of fiduciary imprudence or disloyalty. Rogers referenced the need to show “special circumstances” that impacted fund management, citing a U.S. Supreme Court standard from Fifth Third Bancorp v. Dudenhoeffer.

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The plaintiff claimed that Clorox’s method of reallocating forfeited contributions effectively used plan assets to offset the company’s expenses, which he argued was improper under the Employee Retirement Income Security Act. Clorox countered in its motion to dismiss, stating that redirecting forfeitures within the plan itself is allowed.

ERISA’s anti-inurement provision mandates that plan assets solely benefit participants or cover plan costs. Referencing a 1999 decision in Hughes Aircraft Co. v. Jacobson, Rogers noted that incidental benefits to employers do not violate this rule and ultimately dismissed this specific claim, as indirect benefits to Clorox were deemed insufficient grounds to move ahead.

“In those cases, as here, defendants received indirect and incidental benefits from funds to which plaintiff is not entitled under the Plan language,” Rogers wrote. “The Court GRANTS defendants’ motion to dismiss on this ground. As plaintiff indicated on the record that he would not reassert this claim, LEAVE TO AMEND is not granted.”

The ruling is an initial positive for Clorox, one among many recent defendants alleged to have misused plan forfeiture funds.

The Case

The initial complaint in McManus v. The Clorox Co. was filed in October 2023 in U.S. District Court for the Northern District of California by McManus, a participant in the company’s 401(k) plan, alleging the company misused forfeited funds. McManus claimed Clorox improperly applied these funds—totaling about $5.7 million from 2017 to 2022—to reduce company contributions rather than to defray plan costs for participants. In December 2023, Clorox filed its motion to dismiss the case.

Clorox’s defense argued that its use of forfeitures aligned with IRS guidelines and was documented within its plan rules. The company asserted that the allocation of forfeited funds to reduce employer contributions is a well-established practice supported by IRS regulation. Clorox’s lawyers claimed this is consistent with federal guidance and noted that the complaint is part of a larger wave of similar suits.

Using 401(k) plan forfeitures to offset employer contributions has been a longstanding practice permitted by U.S regulators, according to experts. But recent litigation scrutinizing plan fiduciaries’ use of forfeitures under ERISA continues both to be filed and to progress in the courts.

In August, a class action complaint was filed against Bank of America, and two existing lawsuits against Intuit Inc. and Qualcomm Inc. survived district court challenges by the defendant companies. The plaintiff in the Bank of America lawsuit is represented by Haffner Law PC. Meanwhile plaintiffs in the Intuit and Qualcomm cases were Hayes Pawlenko LLP.

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