Compliance November 26, 2019

Supreme Court Will Not Review Case Regarding Group Annuity in Retirement Plan

The high court's decision lets stand a ruling that Great-West, as a non-fiduciary party in interest was not liable for alleged ERISA violations.

Reported by

On November 25th, the U.S. Supreme Court denied a retirement plan participant’s petition to review a case in which the 10th U.S. Circuit Court of Appeals found that Great-West, as a non-fiduciary party in interest, was not liable for breaches alleged regarding its group annuity contract offered to retirement plans.

In the case, the plaintiff alleged that Great-West engaged in self-dealing transactions prohibited under the Employee Retirement Income Security Act (ERISA) Section 406(b), and caused the plaintiff’s retirement plan to engage in prohibited transactions with a party in interest in violation of ERISA Section 406(a). According to his complaint, Great-West had breached its general duty of loyalty under ERISA Section 404 by setting the credited rate of its Key Guaranteed Portfolio Fund for its own benefit rather than for the plans’ and participants’ benefit; setting the credited rate artificially low and retaining the difference as profit; and charging excessive fees.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

Previously, the 10th Circuit held that Great-West’s contractual power to choose the credited rate did not render it a fiduciary under ERISA because participants could “veto” the chosen rate by withdrawing their money from the fund in question. As to Great-West’s ability to set its own compensation, the 10th Circuit held that Great-West did not have control over its compensation and thus was not a fiduciary because the ultimate amount it earned depended on participants’ electing to keep their money in the investment fund each quarter.

In his petition to the Supreme Court, the plaintiff said Great-West’s conduct violates ERISA’s clear rules barring parties in interest from using plan assets (i.e., the fund contract) to benefit themselves. He pointed out that the U.S. Supreme court previously held in Harris Trust & Sav. Bank v. Salomon Smith Barney that where a party in interest violates those rules, plan participants can force them to disgorge their ill-gotten gains. Multiple courts of appeals have held the same.

The plaintiff said the 10th Circuit “flouted that rule, holding that disgorgement was unavailable because the plan asset at issue was the fund contract—not specific property over which petitioner could himself assert title.”

According to the petition, the sole question before the lower courts was whether equitable relief was available in the form of disgorgement of Great-West’s unreasonable profits derived from its contracts with ERISA plans. The plaintiff argued that by answering “no,” the courts erroneously distinguished plan contracts from any other type of plan asset, the use of which could support disgorgement.

The plaintiff also argued that the appellate decision makes no sense, as most prohibited transactions occur via contract.

The Markets November 26, 2019

SEC Gives Nod to More Nontransparent, Actively Managed ETFs

They are viewed as the third phase in the development of exchange-traded funds.

Reported by

The Securities and Exchange Commission (SEC) has just approved more nontransparent, actively managed exchange-traded funds (ETFs).

“The current percentage of ETF assets in active strategies has been growing—but is still only 2%,” says David Mann, head of global ETF capital markets at Franklin Templeton. “We are believers in the value of active management, so we are eager to see different styles and types of ETFs available in the marketplace and welcome this latest news. We will be watching if these new forms of ETFs help those percentages increase.”

Mann says he was not surprised by the SEC’s latest move, as earlier this year, the SEC gave permission to Precidian to offer a nontransparent, actively managed ETF. “Once that happened, it seemed they would get comfortable with other variations.”

In order for this new type of ETF to be successful, Mann says, “the spread between the bid and the ask will need to be tight. If not, investors are not likely to want to trade them.”

Another headwind that these new iterations of ETFs could face is “they won’t have big trading volumes or a track record,” Mann says. “So, getting that adoption will be interesting.”

For example, Mann says, three years ago, Franklin Templeton launched an actively managed, low volatility ETF tracking U.S. equities. “Its performance has been lights out—but getting increased interest in it has been a challenge because offering actively managed ETFs has been a battle so far. So, here is a super-high performing fund in an asset class that people want, and it is still a challenge, so it wouldn’t surprise me if these new funds face similar headwinds.”

Grant Engelbart, senior portfolio manager and director of research for CLS Investments, is more optimistic about the new offerings. In fact, he thinks “there could be substantial runway for these strategies.”

Engelbart calls the new developments the third phase of ETF developments. “The first was the introduction of ETFs tracking market cap-weighted indices,” he says. “The second was the introduction of smart beta ETFs tracking non market-cap weighted indices by valuations or niche areas of the market. Third could be the third phase and represent a huge step toward tax efficiency in the mutual fund space.”

«