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Compliance May 30, 2024
Bechtel Faces 401(k) Suit Over Default Managed Accounts
The global engineering firm’s $5.1 billion retirement plan committee is sued for defaulting participants into managed accounts plaintiff alleges did not merit the fees.
Reported by Alex Ortolani
Engineering and construction firm Bechtel, its board and its trust and thrift plan committee have been sued for allegedly defaulting plan participants into managed accounts that was not justified for the fees.
Plaintiff Debra Hanigan, a current participant in the plan, filed the suit Friday seeking class-action status in the U.S. District Court for the Eastern District of Virginia, Alexandria Division. The suit, Hanigan v. Bechtel Global, is being led by law firm Fitzgerald Hanna & Sullivan PLLC along with Walcheske & Luzi LLC; the plaintiffs are seeking payment including “all profits which participants would have made if the defendants had fulfilled their fiduciary obligations.”
The allegations are of note as managed account use in retirement plans is seeing growth as plan sponsors seek to offer more personalized investing and advice in workplace plans. Proponents have made the case that managed accounts provide relatively low-cost access to personalized investing and advice access, though they are more often offered as an option and not a qualified default investment alternative for participants, according to data from Cerulli Associates.
The plaintiff argued, however, that without participant engagement the managed accounts did not produce results worth the additional fees, particularly when target date funds could have provided similar results at a lower cost.
“Without additional personalization of information from Plan participants, managed accounts are essentially expensive target-date funds, focused on the single demographic factor of age,” the plaintiff alleged. “Prudent fiduciaries would not automatically enroll plan participants, who tend to be disengaged and do not provide additional personalized information to the recordkeeper, in an expensive MA program when much less expensive target-date funds for that purpose are readily available.”
The suit also argued that setting up the managed accounts as a QDIA “significantly and imprudently” increased the administrative fees paid to the recordkeeper from participants when compared to defaulting them into TDFs.
The managed accounts were run by Edelman Financial Engines as provided by recordkeeper Empower, according to the lawsuit. Neither was named as a defendant in the suit, nor did they immediately respond to requests for comment. Brechtel also did not respond to a request for a response.
Bechtel’s plan had $5.1 billion in assets as of 2022 as held by 15,508 participants, according to the lawsuit. Participants allegedly paid an average annual rate of $320 for recordkeeping, administrative and managed account fees, according to the suit. Without the managed account, fees would have been between $24 and $29, allegedly.
The plaintiff claimed that the “vast majority” of plan participants were defaulted into the managed account program during the class period without being asked for personal information to further customize the offering to their needs, and thus, “were enrolled in essentially very expensive and imprudent TDFs.”
“Plaintiff did not receive any in-person financial planning advice as part of her enrollment in the Empower managed account program during the Class Period,” according to the lawsuit.
The plaintiff also alleged that recordkeepers are “economically incentivized” to use managed accounts as they can charge higher fees, with Empower and Edelman Financial Engines allegedly earning “tens of millions of dollars” as participants lost “tens of millions of dollars.”
Proponents of managed accounts, including providers, have argued that the service can both improve investment outcomes as well as provide holistic financial guidance to participants who otherwise would not be able to afford a financial adviser.
In addition to recordkeepers, many plan sponsors and advisers are seeing value in managed accounts, with 52% of consultant-intermediated plans offering managed accounts, according to a recent white paper from Cerulli Associates. Among those, 5% use it as a dynamic QDIA, in which participants are defaulted into the service when they hit a certain age; 3% use it as the plan QDIA.
In 2020, Shell Oil Company was sued for allegedly allowing participants to be charged excessive fees in part for use of managed accounts provided by Fidelity Investments. Fidelity was not named as a defendant in the case, which this November was suggested for trial by a federal judge, according to court records.
