Compliance January 30, 2017

Edward Jones' Self-Dealing Suit Permitted to Proceed

Defendants unsuccessfully argued that the breach of fiduciary claims should be dismissed because they fulfilled their duties by offering an array of investment options.
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A federal court judge has denied most of Edward Jones’ motions to dismiss a lawsuit alleging the company favored its own investments and those of its “preferred partners” in its 401(k) plan, at the expense of performance.

The Edward Jones defendants argue that the breach of fiduciary claims should be dismissed because they fulfilled their duties by offering an array of investment options. Plaintiff Charlene F. McDonald’s complaint asserts that defendants violated their fiduciary obligations and affiliated themselves with funds which benefited defendants at the expense of the plan participants. U.S. District Judge Rodney W. Sippell of the U.S. District Court for the Eastern District of Missouri Defendants’ found Edward Jones’ defense that they offered an array of investment options does not insulate them from McDonald’s claims.

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Edward Jones defendants argue that the complaint fails to state a claim for a breach of fiduciary duties and for a failure to defray plan expenses, but Sippell found the complaint, when read as a whole, has provided sufficient facts to plausibly state these claims. Defendants dispute the complaint’s factual allegations and argue that they acted within the Employee Retirement Income Security Act’s (ERISA) standards. “In deciding a motion to dismiss I must determine whether the complaint states a claim for relief. Defendants’ arguments in support of their motion to dismiss challenge the factual allegations of the complaint and are premature at this stage of the litigation,” Sippell wrote in his opinion.

NEXT: Lack of standing and claims are time-barred

The court rejected defendants’ argument that McDonald does not have standing to challenge the defendants’ duties regarding the plan funds in which she did not personally invest. Sippell noted that in addition to bringing claims on her own behalf, McDonald is seeking relief on behalf of the plan. In a suit brought pursuant to ERISA, a plan participant may seek recovery for the plan even where the participant did not personally invest in every one of the funds that caused an injury to the plan, he concluded.

Sippell also rejected Edward Jones’ argument that McDonald’s breach of fiduciary duty claims are time-barred. McDonald’s complaint alleges that defendants breached their fiduciary duties by making imprudent investments. Section 1113(2) of ERISA provides that a limitations period to bring an action runs from three years after the earliest date on which the plaintiff had actual knowledge of a breach of the statute. In her complaint McDonald alleges that she did not discover the “substance of deliberations, if any, of defendants concerning the plan’s menu of investment options or selection of service providers during the class period” until shortly before commencing the action. Sippell noted that for purposes of a motion to dismiss, a plaintiff’s factual allegations are deemed true. “It appears from the face of the complaint that this action was timely filed,” he wrote.

Finally, the defendants argue that defendant Jones Financial, Edward Jones parent, should be dismissed from this action because it was not a plan fiduciary. Sippell found that McDonald’s complaint does not allege that Jones Financial was a plan fiduciary nor does it assert any facts which would establish Jones Financial was a plan fiduciary, so he granted the motion to dismiss as to Jones Financial.

Products January 30, 2017

Betterment for Business Eager to Challenge Major Recordkeepers

Shifting regulations, evolving consumer demands and a strong response from established providers are real challenges, but low-cost automated 401(k) platform providers remain committed to DC industry disruption. 
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PLANADVISER was recently invited to talk industry trends with executives at Betterment for Business, just about a year after the firm first caught the attention of defined contribution (DC) retirement industry professionals.

Readers may recall the firm’s (somewhat controversial) claim that Betterment for Business, launched formally in January 2016, is the “only full-service platform providing recordkeeping and advice.” It should be noted that other firms argue they can offer just as much integration, automation and transparency as Betterment, whether solo or in partnership with one another, “but it’s just not true,” according to the advisory-turned-recordkeeping firm.

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Cynthia Loh, general manager at Betterment for Business, says the firm has since won and onboarded more than 300 plan sponsor clients representing tens of thousands of participants. “We started by onboarding our own 401(k),” Loh adds. “We find it very beneficial to be able to tell our clients that our own plan was the very first one. Internally we have close to 30 individuals dedicated to this portion of our business now.”

Clients have come from across the economy, but the largest group comes from the technology sector, “which you would expect,” Loh notes. “We’ve also had some success in the professional services space … Our message seems to resonate with doctors’ offices, lawyers’ offices and smaller financial services firms like our own.”

Given the client profile as it has developed so far, clearly some time remains before a firm like Betterment will truly approach and challenge the reach of the major established recordkeepers that control vast swaths of DC business in the U.S. By practically any measure, it would take decades of sustained growth for a firm like Betterment to start to challenge the size of a given mega provider, and this is true at a time when profit margins have been squeezed mercilessly, and maintaining scale seems essential for sustained profitability; yet, executives at Betterment are clearly committed to the vision of one day being a major contender on the scale of a Fidelity, TIAA or Empower.

“At the very early stages we were going up against some of the small players in the marketplace, but as we’ve grown, we are now competing right there with the large traditional recordkeepers that have a lot of the volume in this space,” Loh suggests.

NEXT: Emerging environment may favor disruptors 

Admitting that rapidly gaining scale is obviously a goal for the years ahead, Loh suggests there are a variety of reasons why the current environment favors disruptors at the expense of traditional providers.

“There is an emerging understanding that being a large or small provider has no real bearing on whether you can offer quality, digitally based recordkeeping service,” she says. “We are able to make sure that we implement plan designs that make sure employees are saving across all of their accounts for retirement. This is something that other firms, large or small, can still struggle with.”

Loh says the firm “further benefits from the fact that we have a lot of people on our team who were previously with established recordkeepers and third-party administrators—but they weren’t too stuck in their mindset that they couldn’t embrace our belief that this is an industry ripe for change.”

Asked how Betterment for Business views its relationship with more traditional advisers, and whether the firm views its goal as replacing boots-on-the-ground advisers or working beside them, Loh suggested it is a common topic of discussion for the firm.

“We plan to continue partnering with advisers—the traditional model is obviously still the way to get boots on the ground and offer the one-on-one human connection that some find important,” Loh says. “There is a big misconception that we are a robo-adviser and therefore we won’t be able or willing to get you a person on the phone or in your office. That is just not true. There will always be some companies that really gravitate more toward having someone come onsite and sit one on one with employees … Frankly that is not really the business model we deliver, and so we welcome those partnerships with advisers.”

Loh agrees that Betterment, like pretty much any firm in the financial services space, is facing a regulatory environment that is just as uncertain as it’s ever been.

“There is so much uncertainty about what will happen with the fiduciary rulemaking and the advice standards, but I think either way you will see a focus on transparency continue,” Loh concludes. “Practically speaking, I expect there will be a major acceleration in the pace of plan sponsors doing formal provider searches and adviser searchers—in order to demonstrate they are doing their part. Plan sponsors understand that it is a serious and ongoing responsibility to ensure they understand what kind of fees they are paying and how this stacks up again industry benchmarks and what’s out there on the market.”

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