Financial Engines and Xerox Questioned in ERISA Suit

Participants seeking to certify a class action lawsuit on behalf of three Ford Motor Company retirement plans say Xerox HR Solutions permitted excessive fees to be assessed on participant accounts, in violation of the ERISA fiduciary duty.

The text of the complaint shows the three Ford Motor Company’s retirement plans are fairly standard in their construction—with an employer contribution-only component tied to a traditional plan for salaried employees and another specifically designed for hourly employees—utilizing a master trust to permit the commingling of assets for investment and administrative purposes.

The master trust, in turn, provides for several individual investment options, and the Ford plans give individual participants the ability to choose among various investment options. As of December 31, 2015, the net assets in the trust totaled $13.94 billion, with the vast majority of the money allocated to the plans permitting employee contributions.

The defendant Xerox provides platform and recordkeeping services to the master trust for the administration of the Ford plans, plaintiffs explain. Financial Engines Inc. (FE), not actually named as a defendant but factoring significantly into the complaint, is described as providing optional advisory services that participants can access if they chose—an arrangement that is not viewed as inherently problematic by plaintiffs.

“FE and Xerox HR were not content, however, with merely providing participants with access to FE’s services,” the compliant states. “Xerox HR wanted a piece of FE’s action, and saw an opportunity to take a percentage of the account of every participant choosing to use FE’s services, in addition to the fees Xerox HR was collecting for recordkeeping.”

NEXT: Details from the text of the complaint 

Accordingly, in order to be included as the investment advice service provider on Xerox HR’s platform, plaintiffs suggest FE inappropriately agreed to pay—and is paying—Xerox HR a significant percentage of the fees it collects from Ford’s 401(k) plan investors.

“For its part, FE was interested in securing an arrangement with Xerox HR to be the exclusive provider of investment advice to participants in retirement plans administered on Xerox HR’s platform, and was willing to charge excessive fees to plaintiffs and other participants in order to meet Xerox HR’s demand for a kickback,” the complaint continues.

Plaintiffs argue these fees are not being paid for any substantial services being provided by Xerox HR to FE or to participants of the plans. While the fees are “being paid ostensibly for ‘data connectivity services’ as described in the Annual Return of the Master Trust filed with the EBSA on Form 5500,” plaintiffs argue they are in reality “being paid as part of a so-called ‘pay-to-play’ arrangement; better described in the pejorative as a kickback.”

The plaintiffs ask the court for relief, arguing the arrangement wrongfully inflates the price of FE’s professional investment advice services that are, by all accounts, critical to the successful management of workers’ retirement savings.

Specifically, plaintiffs argue Xerox and FE are in violation of the Employee Retirement Income Security Act (ERISA) fiduciary responsibility and prohibited transaction rules under sections 404, 405 and 406.

NEXT: Digging into the allegations 

Irrespective of how the matter proceeds, the text of the complaint offers some interesting insights into the way Ford, Xerox and FE negotiated various service arrangements throughout the years.

Back in 2011, according to the complaint, Ford initially negotiated a “professional management fee” with FE as a percentage of the value of a participant’s account invested through FE—at a rate of 45 basis points for the first $100,000 invested; 35 basis points for the next $150,000 invested; and 20 basis points for amounts in excess of $250,000 invested.

The complaint goes on to cite FE’s Form 10-K filing for fiscal year 2015, which states with regard to the arrangement with Xerox HR: ”In these relationships, we are the primary adviser and a plan fiduciary. Data is shared between the plan providers and us via data connections. In addition, our sales teams directly engage plan sponsors, although, in some cases, we have formed and are executing a joint sales and collaborative marketing strategy with the plan provider. We have separate contracts with both the plan sponsor and plan provider, and pay fees to the plan provider for facilitating the exchange of plan and plan participant data as well as implementing our transaction instructions for member accounts.”

Plaintiffs argue it is improper for FE to be making these payments to the plan provider because the practical effect is that FE is “paying to play” and ends up participants charging more than reasonable or necessary for advisory services. 

“On information and belief, FE is paying Xerox HR over 30% of the fees it receives from the Ford Plans,” plaintiffs state. “For example, according to the Master Trust’s 2015 Form 5500 Filing Schedule C, the Ford Plans paid FE $5.79 Million, and FE paid $1.84 Million of this amount back to Xerox HR, purportedly for “Data Connectivity Services.” On a relative value basis, Xerox HR’s fee for whatever service, if any, it actually provides with respect to participants’ use of FE’s service is plainly unreasonable.”

The full text of the complaint is here.