Compliance September 16, 2021

CommonSpirit ERISA Suit Dismissed

In its rejection, the court said the plaintiff, who took issue with the plan’s use of the Fidelity Freedom Funds TDF series, did not allege facts that proved imprudent conduct.

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An Employee Retirement Income Security Act (ERISA) lawsuit challenging CommonSpirit Health’s use of the Fidelity Freedom Funds target-date fund (TDF) series and its recordkeeping fees has been dropped.

The U.S. District Court for the Eastern District of Kentucky granted the defendant’s motion to dismiss the complaint after agreeing that the plaintiff did not allege facts that proved imprudent conduct on the part of the defendants.

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CommonSpirit Health, a not-for profit corporation that provides hospital services, was facing litigation from a former employee of the company and participant of the plan, who alleged the company had provided an “inadequate selection of investment options” in the employer-sponsored 401(k) plan and allowed for “unreasonable expenses to be charged for the administration of the plan.”

The plaintiff claimed the company’s administration committee had violated its fiduciary duties of prudence and loyalty under ERISA after retaining Fidelity Management Trust Co. as the plan’s recordkeeper from July 2, 2014, to the present day. In exchange for its services, Fidelity charged recordkeeping fees that were paid by plan participants through a deduction of investment income.

The plaintiff had claimed that the committee selected investment funds with higher fees and subpar performance; offered an investment menu that was more expensive than that of comparable plans; and allowed the plan to pay excessive recordkeeping fees to Fidelity.

The complaint named the Fidelity Freedom Funds, a suite of 13 funds that are actively managed by Fidelity fund managers, as having higher operating costs compared with Fidelity’s passively managed index funds. As alleged in the complaint, while the expense ratio for the passive index suite was 0.08%, the expense ratio for funds in the active suite ranged from 0.42% to 0.65% for the K Share class, which the plan used until 2018. The plan now uses the K6 share class, with expense ratios ranging 0.37% to 0.49%.

As a result, the plaintiff alleged that plan participants who invested in the active suite would have collectively saved more than $1.24 million in fees in 2018 alone, had they invested in the index suite instead.

The plaintiff also claimed the active suite funds consistently underperformed compared with the passive index suite, citing lower rates by Morningstar and a 2019 report that showed rising investor demand for Fidelity’s index suite and falling demand for the active suite.

The defendants had filed a motion to dismiss the lawsuit, arguing that the plaintiff lacked Article III standing regarding her claim that the company imprudently chose investment vehicles that underperformed. Additionally, they stated that the plaintiff’s complaint, as a whole, “fails to state a claim upon which relief may be granted.”

Regarding the Article III issue, the court said that “contrary to the defendants’ contention, the plaintiff’s investment in one of the challenged funds is sufficient to confer standing to sue on behalf of plan members who invested in the remaining challenged funds.” It noted, however, that “standing is not dispensed in gross and a plaintiff must demonstrate standing for each claim he seeks to press and for each form of relief that is sought.”

In its dismissal, the court said the plaintiff had failed to “allege facts showing that the recordkeeping fees exceeded those of comparable plans or were excessive in relation to the service provided.” The court also stated that the plaintiff had “failed to identify another recordkeeper that would have been willing to conduct the same service as Fidelity,” at a reasonable rate.

On the claim that CommonSpirit Health had breached its duty of loyalty, the court found that the complaint did not differentiate between the defendant’s alleged violations of the duties of prudence and loyalty, as required when alleging disloyalty under ERISA. As a result, this claim was also dismissed by the court.

Other lawsuits challenging the use of the Fidelity Freedom Funds TDF suite have seen some success. In July, a federal district court judge denied the dismissal of two claims in a lawsuit against Prime Healthcare Services.

Client Service September 15, 2021

Practice Progress: How to Lose a Client (or Not)—Lessons Learned From Unsuccessful Advisory Relationships

Julia Carlson and David J. Wright of Financial Freedom Wealth Management discuss how the loss of clients during the firm’s growth resulted in new opportunities for successes.   

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PLANADVISER’s most recent Practice Progress webinar offered suggestions for financial advisers who are debating about leaving a struggling client relationship.

Julia Carlson, founder and CEO of Financial Freedom Wealth Management Group in Newport, Oregon, began the webinar by recounting the positives—and negatives—of growing her firm, a move that ultimately ended up losing her several clients.

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At first, Carlson worked on her own as the sole adviser at her firm and only hired assistants to help her with scheduling or organizing paperwork. When she began to hire additional advisers as the firm increased its size and assets, Carlson was met with some pushback from clients who had worked with her since the start. Former clients who had partnered with Carlson for years refused to work with newer advisers at the firm.

“Those clients that I had 20 years ago, they were always expecting just Julia,” Carlson explained. “And that’s a problem for a lot for advisers who are growing their practices. They were wanting all my attention, and in the past I could have done that, but now I couldn’t do that anymore.”

While Carlson said she recognized the loss of assets the firm faced when dropping a client—up to thousands of dollars in assets at times—she knew there would be a new set of clients who valued the work of an advisory team and not just an individual adviser.

“The clients trust that there is a team involved, that it’s not just one person,” she said. “They want that partnership value. They want someone who they can rely on and who can be that fiduciary for them.”

Today, Carlson employs seven financial advisers and eight support staff on her team at Financial Freedom Wealth Management Group. David J. Wright, a portfolio manager and wealth adviser who works at the firm, said he’s found there’s a level of success that comes with collaborating in a financial service setting, rather than working in an individualized practice. While other firms may hire six advisers, each with a different role, he finds most clients prefer the synergy of a team and the alliance it creates. “A lot of clients want more than just investments,” he said during the webinar.

As she was growing her firm, Carlson said she realized that it’s not just clients who respond well to an advisory partnership—it’s new, prospective workers as well. As Carlson added new team members to Financial Freedom, she realized most employees appreciated having a group mentality.

“When you’re adding team members and you’re telling them about the process, people love that. That’s going to be an advantage to the adviser next door that doesn’t have that together,” she said.

Wright agreed, noting that at Financial Freedom, advisers work under a single unit on everything from investments to education. As a result, when one adviser thrives, “we all do well,” he added.

Fostering a team mentality in the workforce will likely translate well to working with clients, too, the two advisers said, since clients can see the firm as a team of advisers working to grow and protect their assets instead of as one person. And it can bring opportunities to work on more than just investments. Aside from providing financial education, for example, Financial Freedom hosts monthly webinars for clients and prospects and is active on Facebook, Twitter, LinkedIn and YouTube.

The team at Financial Freedom also partners with certified public accountants (CPAs) to tell clients how to read their 1040 tax returns and how to save money on taxes. Education on industry changes is also a priority, Carlson and Wright note, and one that might have proved useful during the market volatility in March 2020. When the team reached out to clients during the downturn, many of them weren’t too concerned, a response Wright and Carlson believe was attributed to the team’s education and client services, as well as their past efforts in working together.

Wright recalled that most conversations didn’t even involve investments or assets, and, instead, focused on the health of the people involved. “What amazed me is that most of the talks weren’t even about money—it was about how everything was going, how their health was and letting them know that we’re taking care of their money.”

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