Products August 29, 2016

Cafaro Greenleaf Adds to HSA Advisory Capabilities

The national advisory firm announced the addition of HSA tax-exempt savings analysis to its core service lineup. 
Reported by

Cafaro Greenleaf, a national advisory firm for corporate and public retirement plans headquartered in Red Bank, New Jersey, has announced a new service that will provide analysis of health savings accounts (HSAs) for clients.

As the firm explains, HSAs are tax-exempt private savings accounts for adults who are covered by a high-deductible health plan, designed for the purpose of paying or reimbursing qualified current and future medical, dental, vision, alternative, and preventative care expenses for an individual, spouse or family. They were created to lower overall health care costs without compromising quality and choice in medical care.

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“With an HSA, you can make tax-deductible contributions to pay for health care costs,” explains Wayne Greenleaf, managing principal of CG. “What you don’t use in any given year will stay invested and continue to grow tax-free. The money saved in a HSA can also be withdrawn for medical expenses without incurring any federal tax liability. In short, an HSA is like a 401(k) for medical expenses, because withdrawals for qualified expenses are tax-free. If you can afford the higher deductible and higher annual max, the combination of a high-deductible health plan and an HSA can help you to build up savings to cover the inevitable out-of-pocket health care expenses you’re likely to encounter in retirement.”

Cafaro Greenleaf ensures a fiduciary process around the selection, monitoring and reporting on the HSA’s investments.

“Many HSAs inefficiently sit in money market accounts and are under-utilized as a retirement savings vehicle,” the firm warns. “From optimal plan design and implementation to in-person education and reporting, Cafaro Greenleaf will ensure participants maximize the benefits that an HSA offers. They will extend their independent advice and tailored support to HSAs, helping clients invest in the future health of their employees.”

More information is available online here. 

Compliance August 29, 2016

ERISA Lawsuit Calls Out TDF Fees and Revenue-Sharing

A participant in Safeway Inc.’s 401(k) plan is suing the plan sponsor, its benefits committee and its recordkeeper for breaching their fiduciary duties and/or engaging in ERISA prohibited transactions.
Reported by

A participant in Safeway Inc.’s 401(k) plan is suing the plan sponsor, its benefits committee and its recordkeeper, now Empower Retirement, for breaching their fiduciary duties and/or engaging in transactions prohibited by the Employee Retirement Income Security Act (ERISA) in connection with target-date funds (TDFs) managed by JP Morgan Asset Management (JPM) and offered as investment options in the plan.

In a statement to PLANADVISER, Empower said, “We won’t comment on pending litigation; however, we will say that we believe this suit and the claims it makes are without merit, and we will defend the matter vigorously.”

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According to the complaint, the defendants breached their fiduciary duties to plan participants by selecting JPM target-date funds as investment options for the plan that charged excessive fees as compared to readily-available alternatives.

In addition, in connection with selecting the JPM target-date funds as investment options for the plan, the Safeway defendants also agreed to a “revenue-sharing” arrangement whereby a large portion of the fees charged by the JPM target-date funds and paid by participants was kicked back to the recordkeeper. The complaint says the revenue-sharing was to compensate the recordkeeper for recordkeeping services, but the amount of the fees was far in excess of the reasonable value of such services and thus defendants engaged in transactions prohibited by ERISA.   

The lawsuit alleges that during the relevant times, the JPM Smartretire Passiveblend Funds charged participants in the Plan who invested in such funds between 47 and 50 basis points of the amount invested as a management fee. By comparison, the Blackrock Lifepath Index funds which were replaced by the JPM Smartretire Passiveblend Funds in 2011 charged only a 13 basis point fee.

In addition, the lawsuit says alternatives to the JPM Smartretire Passiveblend Funds that were readily available as of 2011 also charged substantially lower fees. It notes that target-date funds offered by Vanguard, for example, charge about a 15 basis point fee. Also, net of management fees, the Vanguard target-date funds substantially outperformed the comparable JPM Smartretire Passiveblend Funds.

NEXT: Recordkeeping fees too high

According to the complaint, the management fee charged to participants for investing in the JPM Smartretire Passiveblend Funds included a 20 basis point revenue-sharing payment to the recordkeeper. During the relevant time period, the number of participants with account balances in the three 401(k) plans invested through the Safeway Inc. Defined Contribution Plans Master Trust steadily declined. “In other words, [the recordkeeper] received greater and greater revenue for providing the same services to a smaller number of participants,” the complaint says.

The lawsuit also alleges the revenue-sharing payments generated from the JPM Smartretire Passiveblend Funds were far from the sole source of the recordkeeper’s compensation for services. “These companies also received revenue sharing payment from other investments offered through the Plan and direct payments from the Plan for recordkeeping services,” it says.

According to the complaint, the Safeway defendants could have obtained recordkeeping services at a much lower rate, had they negotiated a per-participant payment for recordkeeping rather than an asset-based charge or negotiated a lower asset-based charge when it became clear that the amounts invested in the JPM Smartretire Passiveblend Funds were growing so quickly so as to generate a windfall for the recordkeeper. “The Safeway Defendants breached the duty of prudence in connection with agreeing to the revenue-sharing arrangement for the JPM Smartretire Passiveblend Funds because a reasonable investigation would have found that a per-participant fee for recordkeeping services as opposed to an asset-based revenue-sharing arrangement would have resulted in lower fees,” the complaint says.

The lawsuit is seeking declaration that the defendants breached ERISA fiduciary duties and an order compelling the Safeway defendants to reimburse participants for all losses resulting from their breaches of fiduciary duty, as well as an order awarding damages to participants, with interest as provided by law.

The complaint in Lorenz v. Safeway Inc. et. al. is here.

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