In many of the retirement plan
excessive fee suits involving large plans, it is argued that the size of
the plans’ portfolios gives them real bargaining power to negotiate
lower fees for investments and administration.
A new lawsuit
argues that a $9 million dollar plan also has the ability to negotiate
for substantially lower fees than an individual would pay.
The primary argument in Damberg v. LaMettry’s Collision, Inc. is
that LaMettry’s 401(k) plan used higher-priced retail class shares when
lower-priced institutional class shares were available. The plaintiffs
say plan fiduciaries breached their fiduciary duties under the Employee
Retirement Income Security Act (ERISA) by selecting inappropriate and
imprudent mutual fund classes for plan assets that exposed plan
participants to excessive fees, even when lower-cost options were
available for the same set of investments and when the plan could meet
required minimum investment hurdles.
With the increase in
retirement plan excessive fee suits and a wider range of arguments in
those suits, this case is one example of how unpredictable it is what plan sponsors will be targeted.
The
plaintiffs also accuse plan fiduciaries of failing to have or engage in
a prudent process—or any process—for the consideration, evaluation,
selection, and active monitoring for these funds or lower fee
alternatives.
In addition to the excessive investment fees, the
lawsuit argues that the 114-participant plan paid too much for other
fees. Plaintiffs claim plan fiduciaries breached their fiduciary duty by
selecting an unduly expensive structure for the 401(k) plan—a bundled
recordkeeping and investment management structure.
NEXT: Excessive fees due to bundled arrangement
According to the complaint, Voya
charged plan participants fees to offset sales and marketing expenses in
addition to various support services. Voya charged plan participants
two separate charges to administer this structure in addition to the
previously mentioned investment fees: the Daily Asset Charge and the
Voya Admin Fee. The charges were assessed as a percentage of plan assets
daily and deducted from the participants monthly. When both fees are
combined, the Total Daily Asset Charges (TDAC), the daily fees
associated with administering the structure range from 0.00% up to
0.90%.
The lawsuit accuses plan fiduciaries of failing to conduct
a request for proposals (RFP) for the structure to minimize expenses,
failing to evaluate whether an unbundled or alternative fee structure
was a better option, failing to conduct due diligence regarding whether
the assessed fees were appropriate, and failing to actively monitor the
selected structure’s fees and expenses.
The lawsuit contends that
for retirement plans with more than 100 participants, a reasonable
annual per capita fee paid by retirement plan participants should not
exceed $18. It says plan fiduciaries allowed the plan to pay
dramatically higher fees than reasonable throughout the statutory
period. For example, in 2014, Voya received revenue from the plan for
recordkeeping services that varied with participants’ investment choices
and dollar amounts invested, and the total fees approximated 1.22% of
plan assets, for a total of $113,000. “Despite a reasonable per-capita
fee for these services being no more than $18 for a plan of this size in
terms of total participants, the plan paid almost $886, or 4,900%
higher than a reasonable fee for these services,” the complaint says.
Plaintiffs
allege plan fiduciaries had a flawed process—or no process at all—for
soliciting competitive bids, evaluating proposals with respect to
services offered and reasonableness of fees for those services, actively
monitoring the reasonableness of fees assessed to plan participants,
and choosing a service-provider on a periodic, competitive basis.
A Financial Finesse analysis of
financial wellness assessments completed in 2015 found that employees
with higher financial wellness scores—as measured on a 10.0 scale—also
had higher contribution rates to an employer-sponsored retirement plan.
Specifically,
employees with a financial wellness score of 4.0, 5.0, and 6.0 had an
average deferral rate of 6.57%, 7.38%, and 8.37%, respectively.
Using
this data, Financial Finesse estimated the potential increase in
retirement plan balances for a Millennial employee making $50,000 a year
that improves on a 4.0 financial wellness score. For example, changes
in financial behavior that cause a one-point improvement could
potentially increase their retirement savings by over $100,000, or by
more than 12%, in 40 years. Changes in financial behavior that cause a
two-point improvement could potentially increase their retirement
savings by more than $260,000, or by more than 27%, over that same
period of time.
Liz Davidson, founder and CEO of Financial
Finesse in El Segundo, California, tells PLANSPONSOR this is significant
not only because it quantifies the idea that financial wellness helps
retirement preparedness, but that financial wellness can especially help
Millennials because they have more time.”
Financial Finesse’s
Generational Research report says financial wellness programs help
employees overcome two key biases: “present bias,” the tendency to value
satisfaction today over future satisfaction, and “exponential growth
bias,” the tendency to neglect the value of compounding.
While
all generations can benefit from basic money management, debt reduction,
and retirement education, each generation learns differently and has
different challenges.
NEXT: Baby Boomer challenges and learning style
Financial Finesse’s research found Baby Boomers need help in four particular areas:
Prioritizing their retirement before helping loved ones;
Budgeting to reduce debt and save more to close the retirement gap;
Better managing their investments as they get closer to retirement; and
Planning for long-term care costs.
To
help Baby Boomers prioritize their retirement before helping loved ones
requires holistic financial planning, Davidson says. “We do a
late-career workshop to help them with competing priorities. We help
them understand why retirement is a top priority—you can’t get financial
aid or a loan for retirement. If you put college planning first, your
child may have to help you in retirement.”
Davidson adds that
having in person, one-on-one planning sessions is very important to help
them create an action plan for prioritizing financial obligations and
figure out some trade-offs working with what they have.
According
to the research report, Boomers tend to be more traditional in their
communication preferences. Since they didn’t grow up with as much
educational technology, they’re more used to learning from their own
experiences and may be drawn more to situations in which they can share
those experiences and learn from others. They may be reached most
effectively with a combination of interactive group workshops, written
materials, and especially one-on-one personal communication with a
financial planner. The latter may be particularly important when it
comes to making crucial pre-retirement decisions like how to invest as
they approach retirement, how to take retirement plan distributions,
which pension option to choose, when to start collecting Social
Security, how to pay for potential long-term care costs, and how to plan
for their estate.
NEXT: Generation X challenges and learning style
According to the research, Generation X needs help with:
Reversing the decline in money management;
Making sure they have adequate insurance and estate planning protection; and
Translating their growing retirement and investing awareness into more saving and better investing.
To
help Gen X reverse the decline in money management, having an ongoing
financial helpline coaching program is helpful, says Davidson. “They
tend to be self-service, so they can make calls on their own volition.
It’s also important for them to work with the same person; it takes
trust building for this generation to buy into what they are being
told.”
According to Davidson, debt is one of most common topics
Gen X calls planners about. Planners can help them with strategies to
get out of debt, to establish an emergency fund to avoid debt, and then
save for retirement.
Davidson notes that, while Gen X may be
small in number, they are a particularly vulnerable group, and the
industry needs to pay more attention to this generation Millennials have
more access to financial wellness tools online and through employers,
and she thinks they will have more access to free advice; Baby Boomers
are likely to get full Social Security, and they may have pensions; but
Gen X got planning tools late and most have no pension and they may face
lower Social Security payouts. She says she’s notice a “barbell” of
targeted messaging, focusing more on Millennials and Baby Boomers.
Many
members of Generation X notoriously grew up as “latch key” kids and
developed a strong sense of self-reliance, a pragmatic outlook, and a
cynical suspicion of authority. They prefer to do their own research
online before speaking with a professional and to choose from among
options rather than being told what to do. Finally, Generation X is
currently in a stage of life with competing demands on their time from
work and family. All of this adds up to a need for a multi-channel
educational approach incorporating both online tools they can use on
their own and on-demand personal help from an unbiased source.
NEXT: Millennial challenges and learning style
The research found Millennials need help in two main areas:
Maintaining
and strengthening their money management skills to avoid the same fate
as Generation X. Fortunately, they will have access to technologies and
financial wellness programs that the previous generations didn’t have.
Giving
greater priority to the importance of longer term goals like retirement
planning and investing. Once they do so, they’re likely to take
advantage of a host of technologies like retirement calculators and
robo-advisers that can help them just as they do with their credit.
As
far as giving greater priority to the importance of longer term goals
like retirement planning and investing, Davidson says Financial Finesse
has found that with Millennials, even the word retirement is becoming
somewhat obsolete, for several reasons. With medical advances, this
generation may not suffer some diseases, and will have longer, more
productive life expectancies, so retirement is a blurry line. Because
Millennials' retirement may potentially change to different types of
working or a phased approach, Millennials don’t relate to the
stop-working concept.
“What they do relate to is living life on
their own terms—flexibility and freedom to live the life they want to
live,” she says. “Plan sponsors and advisers should talk to them about
financial freedom—from not being tied to a specific job so they can
pursue their own interest, to the level of ‘You're good for the rest of
your life, so you don’t need a job for income, you can do one for love
or volunteer or start your own business’ The message is about creating
the life they want as opposed to saving for retirement.”
Millennials
are drawn to technology, working in groups, and having fun while
learning. They also tend to have shorter attention spans, so breaking up
messages may be more effective. Online tools, group workshops, and
programs that incorporate aspects of gamification are generally most
attractive to them. It’s also important for them to see how their
actions can lead to real results, both in the long and short term, and
to receive immediate and ongoing feedback. For this reason, online tools
that track their progress and ongoing coaching can be beneficial.
One
thing that struck Davidson about the research is that across
generations, there is an increase in people knowing their numbers—credit
scores, how much is needed for children’s college education,
projections for how much they need in retirement. “It shows how new
tools and technology are making a difference.
The full Financial Finesse Generational Research report is here.