Compliance April 12, 2016

Court Denies Motions to Dismiss in Fidelity, Putnam Fee Cases

Both excessive fee cases will move forward.
Reported by

U.S. District Judge William Young of the U.S. District Court for the District of Massachusetts has denied motions to dismiss excessive fee lawsuits against Fidelity Management Trust and Putnam Investments. 

In a combined order, Young said that in factually complex Employee Retirement Income Security Act (ERISA) cases such as the ones against Fidelity and Putnam, dismissal is often inappropriate. He added, “At the current stage of litigation, when the Court must draw all reasonable inferences in favor of the non-moving party, the Plaintiffs’ complaints in these two actions allege facts sufficient to state plausible claims.” 

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

The case against Fidelity involves a  stable  value  fund,  the  Fidelity  Group  Employee  Benefit  Plan  Managed Income Portfolio Commingled Pool (MIP), which, the complaint says, at all relevant times had such low investment returns and high fees that it was an imprudent retirement investment. The poor performance and high fees of the MIP were the result of the intentional actions and omissions of the trustee and fiduciary for the MIP, Fidelity Management Trust Co. The complaint was filed on behalf of all retirement plans that invested in the MIP.

The complaint says that prior to 2009, Fidelity engaged in an imprudent investment strategy for the MIP that caused substantial losses to the fund and accordingly exposed itself and the MIP’s wrap providers to such losses. Faced with a serious decline in the MIP’s market value, and with resulting pressure from the wrap providers—which were exposed to liability in the event of significant MIP fund withdrawals—Fidelity responded by adopting an unduly conservative investment strategy that was contrary to the purposes of stable value fund investing. Specifically, the company allowed the wrap providers to charge excessive fees, as well as charging excessive fees for its own account, the complaint alleges.

Putnam is accused of self-dealing in its own retirement plan for employees to promote that firm’s mutual fund business and maximize profits at the expense of the plan and its participants. The complaint says Putnam loaded the plan exclusively with its own mutual funds, without investigating whether plan participants would be better served by investments managed by unaffiliated companies.

The court’s order denying motions to dismiss in both cases is here.

In Practice April 11, 2016

Final Fiduciary Rule Still Favors Level-Fee Work

Even with some significant softening by the Department of Labor and a more workable ‘best interest contract’ exemption, the new fiduciary rule is sure to drive more level-fee business for plan advisers and their service provider partners.
Reported by

Experienced Employee Retirement Income Security Act (ERISA) attorneys and business development executives at Ascensus tell PLANADVISER the Department of Labor (DOL) final fiduciary rule still inherently favors flat-fee service arrangements for qualified plan clients and “an open architecture future for accessing retirement plan investments.”

Todd Berghuis, an experienced attorney and head of Ascensus’ ERISA compliance group, is among the crop of industry insiders who are hard at work pouring over the nearly 1,000 pages of fresh rulemaking that composes the DOL’s final fiduciary rule package. It’s tedious but also exciting work, he notes, and it is only just beginning, given the serious length and complexity of the rulemaking language.  

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

“Overall, frankly, I have been quite surprised by some of the softening that seems to be in the final rule compared with the proposed versions of the rule,” Berghuis says. “Not all of the industry’s comments and complaints were heeded, especially regarding the individual retirement account (IRA) segment of the advisory market, but there was much more positive change, from the industry’s perspective, than a lot of people were expecting, myself included.”

Steve Schweitzer, senior vice president at Ascensus working with the firm’s network of adviser partners, agrees with that sentiment, adding that the industry will need more time to fully appreciate the impact of the final rulemaking.  

“Early reaction we are hearing is especially positive around the reforms to the large plan carve-out, also called the sophisticated investor carve-out, shifting this from a cutoff of $100 million to $50 million,” Berghuis says. “It may seem fairly minor, but this change was much welcomed by the industry, which does a lot of business in this middle market. We think this carve-out will prove to be fairly important in protecting advice and education for plans and plan participants that have not historically employed a fiduciary adviser.”

Schweitzer adds that, for advisers and recordkeepers, “what the DOL did with education materials may also prove to be very important.” Under the previously proposed version of the rule, for example, use of specific asset-allocation models during education and advice sessions “would almost certainly have made an individual into a fiduciary.”

“Fortunately, DOL seems to have improved flexibility for using these types of education materials in a nonfiduciary setting, at least as far as it applies to ERISA plan participants being supplied with things like model portfolio allocations,” Schweitzer says. “They also seem to have made the BIC [best-interest contract exemption] easier to use, which has received very strong positive feedback from the advisory industry.”

NEXT:  Fiduciary compensation models will evolve 

Echoing other firms that started long ago down the road of building open-architecture platforms, the Ascensus executives feel their firm is positioned well for the new fiduciary paradigm.

“I think we’re very well-prepared, and a large part of that is because we are open architecture on our investment platform, and we’ve been very committed to this approach for a while now,” Schweitzer says. “We have many advisers using level compensation arrangements happily, which is clearly going to be easier from a fiduciary compliance perspective compared with practices that rely on variable commissions. Our data shows this is a trend that has been happening for a number of years now, even before the fiduciary rule debate started to heat up again.”

The pair does not believe commissions and revenue sharing will go away overnight, but as Berghuis puts it, “the final regulation is clearly going to have a very large impact on advisers and broker/dealer [B/D] compensation. We’re in the digestion period, but the result is going to be different communication requirements, different contract requirements and even different business flows.”

“At the end of the day, it does not hugely change what it means to be a fiduciary, and it’s not rocket science to be a good fiduciary,” Schweitzer concludes. “More advisers and brokers will be fiduciaries, but they can also feel confident that others are having success as fiduciaries. Level fees are going to play a bigger role in the future.”

«