In Practice August 3, 2011

Wholesalers Left To Fend for Themselves

Sixty percent of asset managers rely on their wholesalers to develop and manage their own business plans for their territories, according to kasina, but few firms provide the necessary tools needed to be successful. 
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Such tools include customer and competitor intelligence, training in business management, and compensation that aligns with profitability objectives. In short, most asset managers rely almost entirely on the wholesaler’s experience and judgment to manage the firm’s pursuit of profitable business opportunities, kasina says in its report, “Excellence in Distribution: External Wholesaling.”

“Smart territory management is the foundation of profitability for an asset manager,” says Lee Kowarski, a principal and co-founder of kasina. “Without rigorous territory management, including customer segmentation, account planning and rewards aligned with profitability goals, firms have little control over whether wholesalers are spending the right amount of time on the right activities with the right customers.”

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The field wholesaler’s primary responsibility is to build business with advisers, says kasina. To be successful requires a keen understanding of what advisers want, in relation to the firm’s profitability objectives. “In-person meetings correlate strongly with advocacy—the adviser’s willingness to recommend a firm’s products. Advocacy leads to increased business.” says Kowarski. “[W]ell over half of advisers who are advocates of a firm plan to increase their business with that firm, compared to 24% of advisers who are not advocates.”

Wholesalers have the highest costs associated with sales but also can have enormous impact on advocacy of the firm and resulting business, the report contends. Thus wholesalers should be focused on the business development opportunities with the greatest long-term potential for the firm.

kasina used data from a 34-question survey and interviews with executives from 28 firms. The report details best practices and recommendations for optimizing territories, organizing resources, staffing and training effectively, and aligning metrics and compensation with profitability goals. For more information about the full report, visit www.kasina.com/reports.

Compliance August 3, 2011

Legal Group Wants Ruling on Use of Retail Funds Reversed

A California employer group has filed an amicus brief in a case over whether 401(k) plan fiduciaries breached their duties by selecting retail-class mutual funds over institutional-class funds.
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The California Employment Law Council (CELC), a non-profit organization that says it works to promote a better legal climate for California employers, is asking the 9th U.S. Circuit Court of Appeals to reverse a district court’s finding that plan fiduciaries breached their duty of prudence by selecting the retail-class mutual funds. The group says the evidence shows the procedurally prudent process by which Southern California Edison and its fiduciaries selected the plan’s investments satisfied the Employee Retirement Income Security Act (ERISA).  

The Council argued that plaintiffs and their amici ask the court to disregard fundamental employer protections built into ERISA and develop new standards which would make it overly burdensome and costly for the average employer to sponsor retirement plans. “Plaintiffs ask this Court to affirm the district court’s finding that defendants breached their obligations in connection with offering three retail mutual funds as plan investments, and thereby modify the already-demanding standard of prudence ERISA imposes on fiduciaries to one imposing perfection,” the brief stated.  

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The Council noted that the district court’s factual findings demonstrate that defendants selected the investments in a procedurally prudent fashion based on expert advice that defendants thoroughly vetted. In addition to conforming to the standards of procedural prudence, evidence showed that defendants’ actions met the then-prevailing standards in the investment community. “To hold ERISA fiduciaries who acted both procedurally and substantively prudently in selecting plan investment options nonetheless liable because they did not act perfectly imposes an untenable measure,” the brief argues. The CELC said defendants acted consistently with the vast majority of benefit plan fiduciaries across the country – the very standard of prudence as the statute defines it. The district court’s finding of liability based on plaintiffs’ second-guessing and hindsight analysis should be reversed. 

According to the CELC, plaintiffs and amicus AARP urge the court to find that retail mutual funds are per se imprudent, at least for large 401(k) plans, and thereby modify ERISA’s prudence standard from a prevailing community one to a requirement to provide the cheapest investments available—regardless of the fiduciary’s (or participants’) views of the investment and irrespective of what other employers’ plans offer. Contrary to this position, courts do not impose specific investment rules of their own – both because it is inconsistent with the statute itself and because the judiciary lacks the expertise to micro-manage fiduciary decisions, the CELC said.  

In addition, the CELC urged the court to reverse the district court’s holding that ERISA §404(c) does not apply where plaintiffs allege that plan investment options were imprudently selected. “To do so would eviscerate the safe harbor, as it is only applicable in instances where such claims are made,” the brief states.  

The Council argues that the U.S. Department of Labor (DoL) assertion that the selection of particular funds is a fiduciary function, and thus any losses resulting from such selection are not attributable to plan participants’ choices from the investment menu but rather from the fiduciaries’ decision to offer the investments is inconsistent with ERISA §404(c) itself. According to the brief, the DoL asks the court to give controlling deference to a recent amendment to its §404(c) regulation, which states that §404(c), “does not serve to relieve a fiduciary from its duty to prudently select and monitor any service provider or designated investment alternative offered under the plan;” however, the DoL neglects to mention that this amendment was not in effect during the time period at issue in this case.

The District Court’s Ruling  

In Tibble v. Edison, U.S. District Judge Stephen V. Wilson of the U.S. District Court for the Central District of California declared that Southern California Edison (SCE) and its plan fiduciaries violated the duty of prudence imposed by the ERISA by not properly investigating the differences between selecting retail shares instead of institutional shares.     

Wilson said that “[w]hile securing independent advice from Hewitt Financial Services is some evidence of a thorough investigation, it is not a complete defense to a charge of imprudence.”    

The court likewise rebuffed defense claims that they couldn’t look further into institutional shares because of mandatory investment minimums placed on those shares. Wilson argued that the fiduciaries should have asked for a waiver of the minimums and noted that the fund managers involved had never turned down a similar request from a similarly sized plan.  

Wilson also rejected the plaintiffs' arguments that the plan fiduciaries opted for retail shares because they wanted to maximize their revenue-sharing revenue given the retail shares’ higher fees. The court said there was no evidence that the plan fiduciaries considered revenue-sharing when they selected the retail-class funds (see "Court Buys Retail vs. Institutional Share Fee Claims").

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