Compliance May 29, 2014

Court Deems MassMutual a Fiduciary for Setting Compensation

A plan sponsor’s lawsuit over revenue sharing payments has moved forward as a court found the sponsor's plan provider became a functional fiduciary by setting fees.
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U.S. District Judge Patti B. Saris, of the U.S. District Court for the District of Massachusetts, noted in a recent opinion that under the Employee Retirement Income Security Act (ERISA) a person is a fiduciary “with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets; (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so; or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.”

Saris found MassMutual exercises the discretionary authority to determine its own compensation by setting separate investment account management fees (up to a maximum), which in combination with revenue sharing payments (RSPs), make up the provider’s compensation package. “A reasonable fact-finder could determine that MassMutual functions as an ERISA functional fiduciary under subsection (i) to the extent it determines its own compensation, takes fees out of the separate accounts, and has the discretion to offset some or all of the RSPs against management fees as its compensation,” she wrote.

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In addition, the plaintiff in the case, Golden Star, Inc., argued that MassMutual’s services to the plan (such as sending out checks to plan members or reinvesting dividends) fall within the definition of “administration of the plan,” triggering fiduciary status under subsection (iii) as well. Saris agreed that to the extent MassMutual has discretionary control over factors governing its fees after entering into its agreement with Golden Star for administration of the plan, subsection (iii) is implicated as well.

Because she concluded that MassMutual is a functional fiduciary under subsections (i) and (iii) when it determines its compensation package for services provided in the separate investment accounts, Saris said, she needs not analyze the plaintiffs’ other theories for triggering fiduciary duties.

The wider case centers on Golden Star’s claims that MassMutual violated ERISA when it received revenue sharing payments from third-party mutual funds. Golden Star alleges these payments were essentially “kickbacks” that constituted prohibited transactions under ERISA, and violated the fiduciary duties imposed by the statute. MassMutual moved for summary judgment solely on the question of whether it qualifies as a “functional fiduciary” within the meaning of ERISA. Saris denied its motion.

The opinion in Golden Star, Inc. v. MassMutual Life Insurance Company is here.

Data & Research May 29, 2014

529’s Asset Appetite Shows 20% Rise

Adviser-sold college savings plans gained traction, and now show balances equivalent to direct-sold plans, research shows. 
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529 college savings plans had an increase in assets of about 20% during 2013, reaching nearly $200 billion in total assets under management, according to Morningstar’s annual study of 529 college savings plans.

Direct-sold 529 plans had been growing at a faster rate than adviser-sold plans and held 51% of the industry’s assets in 2012. Last year, direct- and adviser-sold plans experienced nearly even growth and now have similar asset balances. Adviser-sold plans had approximately $98 billion while direct-sold plans held nearly $102 billion, as of December 2013.

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Key findings of the study include:

  • Of static 529 investment options, those offerings diversified among stocks, cash, and bonds gained the most in new flows last year. Options in the Static Conservative Allocation category took in approximately $890 million in 2013, the highest in terms of new asset flows by category.
  • Two bond peer categories had net outflows within 529s—U.S. Government and Intermediate Bond. Withdrawals in these categories may reflect families tapping into their 529s for college expenses, but also may reflect concerns about rising interest rates, Morningstar says.
  • Some plans that market their investments outside their home state’s borders attracted significant assets. At more than $46 billion, Virginia’s 529 plans continue to have the most assets under management by a wide margin. Virginia’s CollegeAmerica 529 plan is the nation’s largest, with just more than $44 billion in assets under management, and is distributed nationally through advisers who use CollegeAmerica’s program manager, American Funds, in their clients’ portfolios. Nevada and Utah have disproportionately large assets under management relative to their populations, but both are home to 529 plans that are marketed nationally. Both states are among the top 10 in terms of 529 plan assets under management.
  • The industry’s average glide path for age-based investment tracks, in which asset allocations change over time and becomes less concentrated in equities as the beneficiary gets older, has slightly shifted since Morningstar first began publishing glide path data for 529 plans in 2010. Today, the average glide path has slightly less equity exposure at the earliest stages and slightly more equity exposure in the middle years. Overall, the typical age-based track starts with an 80% allocation to stocks and gradually cuts that exposure to 10% at the age of college enrollment.
  • Performance comparisons of closed architecture plans, which include investment options with underlying investments from a single provider, versus open architecture plans, which include investment options with underlying investments from a number of providers, show narrow differences and little clarity about the advantages of either approach.

“The 529 industry saw admirable growth of 20% in 2013,” says Kathryn Spica, Morningstar senior analyst for fund-of-funds strategies. “The law of large numbers suggests that the 529 industry’s growth would slow as it matures, but that isn’t necessarily the case.”

Plan assets have also been stoked by stock market gains across the board, says Spica, noting that diversified options also continue to gain traction among investors. “In 2013, as well as in previous years, the categories attracting the most flows are diversified among stocks, bonds, and cash,” she says.

The 529 report evaluates 84 U.S. plans by total assets under management, asset flows by category, assets by state, and plan structure,while also applying Morningstar’s five key rating measures, which include “process, performance, price, people and parent.” The annual report is a companion piece to the Morningstar Analyst Ratings for 529 College-Savings Plans, typically issued in October.

Morningstar’s 529 plan landscape study is available at here.

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