Compliance July 5, 2016

Fujitsu Faces 401(k) Lawsuit by Participants

In addition to calling Fujitsu's 401(k) the most expensive large plan in the country, the lawsuit calls out the defendants design and implementation of custom TDFs.
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A newly filed retirement plan excessive fee suit claims fiduciaries of the Fujitsu Group Defined Contribution and 401(k) Plan breached their fiduciary duties of loyalty and prudence under the Employee Retirement Income Security Act (ERISA) by designing and administering one of the most expensive large 401(k) plans in the country.

According to the complaint, as of the end of 2013, the plan had approximately $1.3 billion in assets. The lawsuit contends that among defined-contribution plans with more than $1 billion in assets, the average plan has costs equal to 0.33% of the plan’s assets per year. However, in 2013, total fees for the Fujitsu plan amounted to approximately 0.88% of Plan assets, or about $11,400,000. In 2014, total fees amounted to approximately 0.90% of Plan assets, or about $11,900,000.

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“These fees are almost three times higher than the average for plans of similar size, making the Plan one of the five most expensive defined contribution plans out of approximately 650 plans with assets of over $1 billion dollars. Had the Plan simply maintained average expenses (which likely exceed the costs a prudent fiduciary would incur), the Plan would have paid only $4,260,000 in fees in 2013, and $4,400,000 in fees in 2014, demonstrating that the Plan incurred at least $7 million per year in excess fees,” the complaint says.

The plaintiffs in the lawsuit, participants in the plan, attribute the high costs to three factors: defendants failed to utilize the least expensive available share class for many mutual funds within the plan; defendants caused the plan to pay recordkeeping and administrative expenses far in excess of what a prudent fiduciary would pay for those same services (plaintiffs estimate that after accounting for revenue sharing, the plan paid approximately eight to ten times what a prudent fiduciary would have paid for recordkeeping in 2014); and defendants systematically failed to manage the plan’s investments in a cost-conscious manner, selecting and retaining investments without regard for the cost of those investments and without considering the availability of far cheaper options that would have provided comparable or superior investment management services.

However, the complaint specifically calls out the design and implementation of the plan’s target-date funds (TDFs).

NEXT: “Fundamentally flawed” TDFs

According to the complaint, in October 2011, defendants transferred the large majority of the plan’s assets into a set of custom TDFs designed by defendant Shepherd Kaplan, LLC. “Despite a marketplace replete with competitive target-date fund offerings and experienced investment advisers, Defendants hired Shepherd Kaplan—an investment adviser with no public track record of managing or designing target-date funds—to create a set of custom target-date funds and select the mutual funds that make up each target-date fund,” the lawsuit states. 

The plaintiffs attribute the investment adviser’s apparent inexperience and lack of a published track record for the asset allocations within the TDFs being “fundamentally flawed.” The complaint says that as a result of fundamental flaws in design and implementation, since their inception the Fujitsu TDFs have underperformed their benchmark indices by several percentage points per year on an overall basis. In addition, fees for the TDFs ranged from 69 bps for the Income fund to 108 bps for the 2055 fund. 

The complaint notes that in March 2016, in response to plaintiffs’ counsel’s investigation and impending litigation, the Fujitsu defendants overhauled the plan’s management and investment lineup, hiring a new investment adviser (who is not a named defendant in the lawsuit) as the plan’s investment fiduciary, eliminating all of the “Fujitsu LifeCycle” funds, and introducing in their place a new set of custom TDFs called the “Fujitsu Diversified” funds. Fujitsu also overhauled the mutual fund lineup within the plan, replacing the majority of the investments previously held. “These recent changes to the Plan, made in response to anticipated litigation, reflect that Defendants themselves understood there were serious problems with the Plan’s investments and design,” the lawsuit contends. 

Fujitsu remedied the share class issues for the mutual funds held by the plan in January 2016, after learning of plaintiffs’ investigation and its specific subject matter. However, the complaint notes that “Defendants did not refund the millions of dollars in excessive fees that participants needlessly paid due to Defendants’ failure to make this change years earlier.” 

The complaint in Johnson et.al. v. Fujitsu Technology and Business of America, Inc. et. al. is here.

Data & Research July 5, 2016

Developing 403(b) Service Strategies Now May Pay Off

Some DC plan providers see big opportunity ahead in helping higher education institutions prepare their workforces for retirement via 403(b) and 457 plans.
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New research from Cerulli Associates finds that implementing and refining defined contribution (DC) plans in the public higher education sector could be a significant area of opportunity for experienced providers.

This is partly because of the overall shift away from defined benefit (DB) pensions in favor of DC, but also because the higher education sector is “beginning to adopt more 401(k)-like practices in terms of investment menu design, which may open it to providers and asset managers that have traditionally focused on corporate DC plans,” explains Jessica Sclafani, associate director at Cerulli.

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Providers are targeting the market because of its unique characteristics, Cerulli finds: “The higher education sector of the not-for-profit DC market is considered attractive for a combination of reasons. The higher education component of the not-for-profit DC market has room for further vendor consolidation, in particular among large public organizations and some smaller private universities and colleges, which concentrates assets with a single provider.”

According to Cerulli, as of year-end 2014, the higher education sector of the non-profit/governmental DC market held the greatest percentage of 403(b) assets, clocking in at $393 billion, or roughly 44% of the market volume. Even more promising is the fact that, “unlike corporate DC plans, which have entered a period of negative net flows, not-for-profit (NFP) and governmental DC plans continue to increase their share of total U.S. retirement assets.”

There seems to be particular attention being paid in the marketplace to the idea of utilizing supplemental DC plans to achieve adequate retirement preparedness at the same time that DB pensions are getting significantly less generous. This high-level trend is opening up a variety of opportunities for advisers and providers to capitalize on their DC plan expertise to bring best-practice design to 403(b)s or other plan structures, Cerulli says. 

“Given Cerulli’s expectations for continued growth, it may behoove asset managers and providers to re-evaluate their exposure to the 403(b) component of the DC market,” Sclafani adds. “Participants in 403(b) plans have considerable latitude in terms of their choice to enroll, their vendor selection, and their investment options, unlike 401(k) plans in which many of these decisions are automated for the participant.”

NEXT: More on the supplemental 457 and 403(b) DC market 

Also promising, according to Cerulli, is that providers frequently work with higher education organizations on more than one DC plan type, because plan sponsors in the space typically view the various retirement plan structures as one holistic benefit program. For example, depending on a given school’s relationship with its home state, in addition to the DB pension and the 403(b) plan there could also be a 457 governmental plan structure, which will typically be offered to all employees or independent contractors—spelling additional opportunity for skilled providers.

Perhaps most important, the Cerulli research shows providers’ opinions are pretty well split about opportunity in these areas. 

“The $4.7 trillion 401(k) market receives the majority of attention from providers, asset managers, and DC plan advisers/consultants, and is largely perceived as an evergreen opportunity to gather and grow institutional retirement assets, particularly in light of increasing pressures on corporate and public DB plans,” Sclafani says. “In contrast, when it comes to the $879 billion 403(b) segment of the DC market, some providers, and even more asset managers, articulate an attitude or culture that pretends the 403(b) segment ‘does not exist,’ ‘should not exist,’ or that it is ‘not an opportunity.’”

Such an outlook is probably short sighted, Cerulli warns.

“While the 401(k) market is a larger opportunity by assets (roughly five times the size of 403(b) assets), Cerulli research indicates that the 401(k) segment entered a period of negative net flows beginning in 2014, when distributions outpaced contributions by greater than $33 billion,” the research concludes. “In contrast, Cerulli projects the 403(b) market to experience positive net flows for the remainder of the decade. However, addressing opportunity in the 403(b) market requires a more thoughtful approach than simply repurposing 401(k) distribution campaigns and products for 403(b) plans. Because the 403(b) market is highly diverse, distribution, client service, and marketing strategies need to be deliberately crafted on a segment-by-segment basis.”

These findings and others are explored in-depth in the second quarter 2016 edition of The Cerulli Edge – Retirement Division. Information about obtaining the report is here. 

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