Products October 9, 2018

Amid DOL Scrutiny, Provider Crafts Solution for Missing Participants

Employees are changing jobs more frequently than ever before, says Mark Koeppen at FPS Trust; when they go missing, this can lead to wasted time and money spent on administration of their orphaned savings.

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According to Mark Koeppen, senior vice president in charge of strategic rollovers for FPS Trust, disproportionate cost-shifting to accounts with higher balances and increased liability are just some of the issues fiduciaries face when employees move on to other opportunities and leave their qualified retirement plan balances behind.

“It is a big challenge for the plan sponsor community, deciding how to deal with growing plan fees from employees who go off to other jobs, leaving the employer to deal with the cost and paperwork of the retirement account they leave behind,” Koeppen says.

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Sensing an opportunity to better serve plan sponsors facing this challenge, FPS Trust has designed a fully automated rollover program that will establish individual retirement accounts (IRAs) for former, non-responsive employees with qualifying balances below $5,000. The solution is also tailored for terminating plans with non-responsive participants.

“We have been focusing a lot on the auto-IRA rollover market in recent years, given how much of a challenge it is for the industry,” Koeppen tells PLANADVISER. “We have been working with plan sponsors, consultants and advisers to try to find solutions to retirement plan leakage. We have learned there are some key points where these stakeholders can come together and create powerful solutions to help protect the assets of retirement plans and participants.”

Among its other initiatives in this area, FPS Trust has moved away from offering a solely FDIC-insured money market-based product set to expand into stable asset funds that can provide a higher crediting rate to the individual account owner after the auto-rollover. Koeppen says the company has also “stripped down fees at the sponsor and participant levels to make this a very straightforward solution.”

“Within our auto-rollover program, the participant simply pays one fee in of $20, and one fee out of $20,” Koeppen says. “There are no other ancillary fees to participants related to statements or searches, and we do not charge trading fees or anything like that. One you get into the higher rollover balances of say $2,500 and up, with our stable asset fund, these participants are actually seeing some real growth with our crediting rate. This shows how the market has matured and how the service providers are seeing more pressure to innovate and to charge a reasonable fee.”

According to Koeppen, his firm is having success promoting the new auto-rollover program in part because plan sponsors are feeling real pressure from the Department of Labor (DOL) on missing participants.

“I have had several clients who have been targeted by full-blown DOL audits on this issue, and the DOL is not backing down from some very stringent demands,” Koeppen says. “In many cases, the DOL auditors have an expectation that a plan sponsor should be able to find every single individual with a balance in their plan, and they won’t leave until you find all of them.”

As Koeppen testifies and others corroborate, plan sponsors are being ordered by DOL auditors to do such things as cold-call potential former colleagues of a missing employee—in other words, plan sponsors are being asked to randomly contact individuals with no direct connection whatsoever to the employer being audited.

“I had one client that went through an audit and had 19 people that she just really couldn’t find, even after a major series of searches,” Koeppen says. “An interesting anecdote, the auditor was pushing the sponsor to sweep these people out of the plan if they truly couldn’t be found, but the plan sponsor had to explain that their plan document wouldn’t allow for that. So this led to some tension with the auditor suggesting the plan document would have to be amended.”

FPS Trust, according to Koeppen, can also help plan sponsors deal with the related and equally frustrating issue of uncashed checks.

“We encourage plan sponsors to be prepared for this issue to become even more important for the DOL, which has already publicly stated that is will be looking closer at the issue of uncashed checks,” Koeppen says. “As a plan sponsor, if you have an opportunity to get out in front of this and deal with these lost people and do something with the uncashed checks, why wouldn’t you do that? Our firm and our competitors will tell you, it is not enough to just blindly rely on your recordkeeper and assume they are taking care of this stuff.”

In Koeppen’s experience, in many cases recordkeepers or third-party administrators may not be properly accounting for the value of uncashed checks as they are calculating figures to report on the Form 5500.

“We see evidence the DOL is taking notice of this discrepancy,” Koeppen concludes. “Fortunately, the leakage question resonates with plan sponsors right now, and there is an organic push for solving these issues. This is a great time to be talking about it because many plan sponsors are thinking about the changes they will have to make in their plan documents for 2019. So, this is the right time to be pushing for a deeper conversation about uncashed checks, missing participants and orphaned small balances.”

Compliance October 8, 2018

SEI Faces ERISA Self-Dealing Lawsuit in District Court

The lawsuit makes sweeping claims about conflicts of interest in the defined contribution retirement plan industry, suggesting financial services companies deserve extra scrutiny.

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SEI Investments Company is the latest investment services provider to face an Employee Retirement Income Security Act (ERISA) lawsuit making allegations of self-dealing.

The lead plaintiff in Stevens v. SEI Investments Company, filed in the U.S. District Court for the Eastern District of Pennsylvania, is an employee of the firm and a participant in the SEI Capital Accumulation Plan. Named as defendants are SEI as a whole, the defined contribution (DC) plan’s investment and administration committees, and some 30 individual fiduciaries.

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The complaint makes a variety of claims about widespread conflicts of interest in the DC plan industry, suggesting that financial services companies such as SEI deserve extra scrutiny.

“For financial service companies like SEI, the potential for imprudent and disloyal conduct is especially high, because the plan’s fiduciaries are in a position to benefit the company through the plan by using proprietary investment products that a disinterested fiduciary would not choose,” the complaint states.

According to the complaint, the defendants offer “only designated investment options that generate fees for SEI and its affiliates and treat the plan as a captive customer of SEI in order to prop up SEI-affiliated investment products and advance SEI’s business objectives.”

The complaint further states that SEI investment products “are not competitive in the marketplace.”

“Participants would have been better served if defendants had investigated and retained non-proprietary alternatives,” the complaint states.

The complaint acknowledges the fact that inclusion of proprietary investment options in a 401(k) plan lineup is not per se imprudent or disloyal. But the lead plaintiff says defendants did not meet their fiduciary obligations to regularly evaluate each investment option within the plan on its merits relative to alternative available options.

“Because SEI-affiliated investment options within the plan have consistently generated lower net returns for investors than investment options with the same objectives available outside of SEI, there was no reason other than self-interest for defendants to offer solely SEI-affiliated options within the plan,” the complaint states. “Indeed, no other defined contribution plan in the country with $250 million in assets or more consists exclusively of SEI-affiliated investment products, and the vast majority of similarly-sized plans do not include any SEI-affiliated investments.”

According to the text of the complaint, SEI’s alleged prioritization of its own business interests over the interests of participants and beneficiaries of the plan constitutes a breach of the fiduciary duties of prudence and loyalty in violation of 29 U.S.C. Section 1104.

As a result of defendants’ alleged violations of ERISA, the lawsuit suggests the plan has suffered millions of dollars in losses.

Digging into the counts

Much of the text of the complaint is spent discussing general characteristics of the DC retirement plan industry. According to the lead plaintiff, it is relevant to observe that financial services companies possess no special insight that allows them to identify which of their own funds are likely to outperform.

“Though financial companies may favor retention of their own funds, this favoritism has empirically resulted in worse performance,” the lawsuit states. “A study of third-party administrators shows that plans administered by asset management firms tend to have the lowest net returns, and that those lower returns are attributable to reliance on proprietary funds.”

Detailed in the text of the complaint are three specific counts, one having to do with a breach of the duties of loyalty and prudence, and two having to do with failures in monitoring.

These counts are based on a core allegation that, despite SEI’s inability to generate competitive long-term returns or attract other large defined contribution plan investors, defendants have exclusively selected and retained SEI-affiliated funds within the plan. According to the lead plaintiff, a prudent and loyal fiduciary would not have managed the plan’s investment lineup in this manner.

“Defendants offered participants 19 SEI funds and SEI stock as designated investment alternatives as of the end of 2011,” the complaint states. “Since then, defendants have only added more SEI-affiliated funds, and have not subtracted any options. One addition, the PIMCO Stable Income Fund, is not branded with the ‘SEI’ name, but SEI is a partner in the management of the fund, and receives fees from the fund. The continuity of the menu and strict reliance on SEI-affiliated products (despite their low performance rankings) suggests that defendants have selected and retained SEI-affiliated funds by default, in lieu of conducting an impartial investigation of options available in the marketplace.”

As further evidence of a flawed fiduciary process, the lead plaintiff points out that the plan’s two largest holdings (the SEI Large Cap Fund and the SEI Small Cap Fund), which accounted for approximately 30% of the plan’s total assets, underperformed their stated benchmarks over the prior one-, three-, five-, and 10-year periods. According to the lawsuit, these funds employ common investment strategies, and numerous comparable non-proprietary alternatives that met or exceeded their benchmarks over the same periods while charging lower or comparable fees were available to defendants.

The lawsuit makes the following allegations regarding the offering of SEI-brand target-date funds within the plan: “Defendants’ judgment also has been compromised with respect to target-date funds. When SEI initially launched its proprietary target-date funds, the funds were promptly added to the plan, despite having no performance records. Since then, they have gained little traction in the marketplace. This has caused SEI to depend on the plan to prop up the funds; indeed, the plan has accounted for 27% to 31% of the total assets in SEI’s target-date funds since 2012. An impartial and prudent fiduciary in defendants’ position would have investigated other options, and would not have retained these proprietary target-date funds.”

The full text of the complaint is available here. 

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