Compliance June 20, 2016

MassMutual Agrees to Settle Excessive Fee Suit

MassMutual has agreed to pay $30.9 million to former and current participants of the MassMutual Thrift Plan and the Massachusetts Mutual Life Insurance Co. Agent Pension Plan.
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According to documents filed with the court on June 15, the parties in excessive-fee case Dennis Gordan et al. v. Massachusetts Mutual Life Insurance Co. et al. have reached a settlement and are awaiting court approval.

The motion, filed in District Court for the District of Massachusetts, states that MassMutual has agreed to pay $30.9 million to former and current participants of the MassMutual Thrift Plan and the Massachusetts Mutual Life Insurance Co. Agent Pension Plan, as well as to meet nonmonetary terms, which, over a period of four years, “secure the prudent operation and administration of the plans.”

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The original action was filed in November 2013. Plaintiffs alleged “that the plans [had] breached their duties under the Employee Retirement Income Security Act (ERISA) by 1) causing unreasonable administrative expenses to be charged to the Plans; 2) providing unreasonably priced and poor-performing investment options; and 3) providing a fixed-income investment option that was unduly risky and expensive.”

Throughout the process, MassMutual has consistently disputed all claims regarding any alleged breaches or ERISA violations. In an emailed statement, Michael McNamara, a spokesman for the company, said, “While MassMutual denies the allegations within the complaint and admits no fault or liability, we are pleased to put this matter behind us, avoiding the expense, distraction and uncertainty associated with protracted litigation. MassMutual is proud to continue to extend our award-winning retirement plan services and benefits to our employees and field participants to help them secure their future and protect the ones they love. Importantly, the amount of the settlement is not material to MassMutual’s financial strength, nor to its 2016 financial results.”

The settlement, beyond the monetary recovery, requires MassMutual to grant relief to participants by, for example:

  • Ensuring that the plans’ participants are charged no more than $35 per participant for standard recordkeeping services;
  • Employing an independent fiduciary to determine that the settlement meets the requirements of prohibited transaction class exemption (PTE) 2003-39 and is fair and reasonable;
  • Ensuring that fees paid to the plans’ recordkeeper will not be set or determined on a percentage-of-plan-assets basis; and
  • Each year during the settlement period, the plan’s fiduciaries will attend a fiduciary responsibility presentation provided by experienced ERISA counsel and an independent investment consultant.

This case joins other excessive-fee cases against large firms such as Fidelity Investments and Ameriprise, which settled for $12 million and $27.5 million, respectively.

The MassMutual settlement agreement is here.

Data & Research June 20, 2016

Schwab Advisor Services Outlook Measures RIA Optimism

Interviews with nearly 1,000 independent advisers who custody assets at Schwab show significant optimism about growth opportunities for registered investment advisers. 
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Nearly three quarters of independent registered investment advisers (RIAs) feel “very optimistic” about opportunities for RIAs to grow in the next five years, according to Schwab Advisor Services’ 19th semi-annual Independent Advisor Outlook Study.

The optimism comes despite significant uncertainly still brewing around the Department of Labor’s (DOL) new fiduciary regulations, which have been cited by some advisers as a likely drag on future profitability. 

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According to Schwab’s polling, most advisers seem to feel the rule, set to phase into effect in 2017 and 2018, will at least change the way they package and market their services—with two in three RIAs (66%) expecting “more competition for securing assets in the five-year timeframe and, likewise, believing the need to differentiate their firms from competition is greater than ever (65%).”

Schwab finds more than half (57%) believe the rule will drive more questions from clients about an adviser’s fiduciary responsibilities, though there is less certainty about what these questions will be or how they will have to be answered. In this context, one in three RIAs (36%) think the DOL rulemaking will increase competition directly by favoring particular service and compensation arrangements. This is about the same number that feels the strengthened fiduciary standard will “create greater challenges for RIA firms to differentiate themselves from wirehouse firms (35%).”

Looking to the markets, advisers are feeling cautious and urging clients to adopt the same attitude, the Schwab research shows. For example, adviser confidence that the S&P 500 will continue its upward trajectory is at a four year low. “Just over half (56%) of advisers expecting the markets to increase in the next six months,” researchers observe. “In addition, the majority of advisers (90%) have needed to reassure at least some portion of their client base in the past six months that they will achieve their investment goals.”

NEXT: More findings from the Schwab Advisor Services

Given the worries about the markets, Schwab Advisor Services finds over half of RIAs expect difficulty in achieving their clients’ investment goals in the near-term future. As such, “one in three (38%) advisers reports spending the majority of their time considering how to prepare for future growth,” and “the majority of organic growth the next five years is expected to be driven by founders and principal-level equity owners.”

This matches other research showing increasingly difficult barriers to entry for the advisory and financial services industries.

“Currently, advisers have most assets under management (37%) in a ‘mature’ lifecycle stage, in which the investor is focused on protecting and maintaining wealth, followed by 25% in ‘aging’ lifecycle stage, in which the investor is focused on spending and planning for distribution to heirs,” researchers explain. Additionally, 23% of clients are in “mid-lifecycle,” seeing their wealth “steadily building but with needs that are getting more complex.”

Just 10% of assets are held by younger clients wholly focused on building wealth over the long term, the polling finds. And while, looking ahead five years, advisers do predict a decreasing percentage of assets in the “aging” and “mature” categories (23% and 33% respectively), it’s still very much the minority of advisers who anticipate serving more “mid-lifecycle” (25%) and “young” (12%) clients over the next five years.

Thinking about wider demographic trends and the potential impacts on client service strategies, 37% of RIAs say they are “factoring changing demographics into their succession planning.” Another 35% of independent advisers are “aiming to attract and serve younger clients, and 29% are aiming to attract and serve more female clients.” Another 10% “plan to attract and serve more ethnically diverse clients.” At the same time, “two-thirds of advisers still aim to attract and serve clients similar to those they have today—and are hiring accordingly.”

More information on the semi-annual Independent Advisor Outlook Study (IAOS) is here. 

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