Compliance October 4, 2017

ERISA Suit Against John Hopkins Partially Tossed

The plaintiffs’ allegations regarding what they allege to be an excessive amount of investment options was summarily tossed by the court, which cites a number of important recent cases as precedence; however, claims regarding excessive recordkeeping fees and providers will proceed. 
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The U.S. District Court for the District of Maryland has granted in part and denied in part defendants’ motion to dismiss an Employee Retirement Income Security Act (ERISA) lawsuit targeting the 403(b) plan of John Hopkins University.

In their initial complaint and subsequent argumentation, plaintiffs allege that fiduciaries of the Johns Hopkins University 403(b) plan violated Sections 404 and 406 ERISA. The case is one of a number filed in district courts across the country by the same counsel who bring virtually identical claims against other big-ticket universities to the ones in this particular action.

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The complaint states that Johns Hopkins has “not prudently managed its pension plan, known as a 403(b) plan, in violation of ERISA.” Plaintiffs further allege, like their counterparts, that Johns Hopkins has not managed the plan for the exclusive purpose of providing benefits to participants and their beneficiaries.

Weighing the arguments presented by both sides, the District Court reached something of a split decision. As laid out in the text, the court “is aware of four recently issued decisions, including from one sister court within the 4th Circuit, which decided motions to dismiss addressing the same issues related to the respective universities’ pension plans.”

Regarding plaintiffs’ breach of fiduciary duty claims (Counts I, III, V), the court “is persuaded by the reasons set forth in Henderson, Sacerdote and Sweda that plaintiffs fail to state a claim to the extent that plaintiffs allege that offering plan participants too many investment options is imprudent … The court is further persuaded by the reasons set forth in Sacerdote and Sweda that plaintiffs fail to state a claim to the extent that plaintiffs allege that including higher-cost share classes in the plan, instead of available lower-cost share classes of the same funds, is imprudent.”

However, the court declines to toss out all of the plaintiffs’ allegations: “Henderson, Sacerdote and Clark all concluded that allegations that a university offering actively managed funds was imprudent supports a breach of fiduciary duty claim under ERISA, and the court agrees, concluding that the unreasonable management fees and performance losses count states a claim. The court is also persuaded by the reasons set forth in Henderson, Sacerdote and Clark that allegations that a prudent fiduciary would have chosen fewer recordkeepers and run a competitive bidding process for the recordkeeping services supports a breach of fiduciary duty claim.”

Important to note, at this stage, the court says it “cannot make a determination that any of plaintiffs’ other claims fail as a matter of law.” Discovery related to those claims will shed light on whether the court can decide the claims as a matter of law or whether a factfinder must resolve any genuine disputes of material fact.

“Regarding Plaintiffs’ prohibited transactions claims (Counts II, IV, VI), the court is persuaded by the reasons set forth in Henderson and Clark that 29 U.S.C. Section 1002(21)(B) (2012) prohibits plaintiffs from bringing prohibited transaction claims as to the mutual funds included in the plan … The court is also persuaded by the reasons set forth in Henderson and Sacerdote that allegations that revenue sharing from a mutual fund is a prohibited transaction under 29 U.S.C. Section 1106(a)(1)(D) (2012) fail to state a claim.”

The court concludes that plaintiffs’ remaining prohibited transactions allegations sufficiently state a claim. Like plaintiffs’ surviving breach of fiduciary duty claims, the court cannot determine that the remaining prohibited transactions claims fail as a matter of law at this stage of the case.

The full text of the decision is available here. 

In Practice October 4, 2017

Mapping Industry Change Just Part of the Job

From a rapidly evolving recordkeeping provider landscape to a potential wholesale rewrite of the tax treatment of retirement assets, today’s environment puts advisers and their clients in a constant state of flux. 
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Todd Lacey, chief business development officer at Stadion, recently visited the PLANADVISER office to introduce his firm’s new target-date fund (TDF) product line, and before long the conversation naturally turned to the myriad regulatory and legislative issues facing retirement plan advisers and their clients.

Lacey was also forthcoming about what he sees as both the challenges and opportunities associated with working closely with defined contribution (DC) plan recordkeepers. He observed that much of his thinking on these subjects is colored by his time spent at both Transamerica and his own independent advisory firm, which he ran from 2007 through 2011.

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“Like many people in this industry, I had a first career as a DC plan wholesaler,” Lacey explained. “I did that for a number of years before becoming an adviser and founding the (k)larity Group. As an interesting aside, right after I decided to sell that business and go back to Transamerica to run business development, PLANADVISER reached out to notify the firm it had been selected for finalist consideration as a Plan Adviser Team of the Year. That was exciting to hear for me, but unfortunate timing.”

Back at Transamerica, Lacey was asked to lead business development efforts and key account management, before spending his last two years working with the firm’s Latin America team. His introduction at the start of this year to Stadion was partly serendipity, in that the firm’s headquarters is located “something like four miles” from his house, so he “figured it could be a good fit.”

Nearly a year into his tenure at Stadion, Lacey continues to enjoy the role and its challenges. He oversees the team that manages relationships with recordkeeping partners, while also opening up distribution channels for the firm’s managed account and TDF products.

“It is an exciting time to do this work because people are willing to take a fresh look at what retirement plans are and what they should be—about how to invest for a future that is more uncertain than ever in a lot of ways,” Lacey said. “The shift from DB [defined benefit] to DC, the increasing role of technology and the seismic change in regulation and legislation affecting this space, all of these trends have a direct impact on the job. Not only Stadion, but many other firms have a great culture that will help us get through this environment and ultimately serve our customers best.”

NEXT: Growth amid uncertainty 

For Stadion, the emphasis amid uncertainty remains clearly on growth, demonstrated by the fact that the firm has a sales team of over 18 people in the field, which Lacey described as “kind of unique for the size of organization we are and for the fact that we were more or less a simply managed account provider in the past.”

“We are working with more advisers every single day, and whether they have two plans or 200, we can support them,” he added. This is a key trend he sees, from his perspective, on the investing side of the DC marketplace—that product development is benefitting both novice and specialist advisers.

“Providers now offer everything from sales-level support to ongoing client support and participant support,” Lacey observed. “We invest a lot in making it easier for DC plan advisers to do their job—it’s a big part of what we do, and it shows our commitment to the adviser industry.”

Given the importance of their own relationships with recordkeepers, advisers may be interested to hear about the aspects of Lacey’s job relating to negotiating and maintaining recordkeeper relationships. At a high level, he sees the large national recordkeepers “struggling with a variety of headwinds—from fee compression to regulatory change under the evolving fiduciary rule, to more exacting client demands and a perceived commoditization of services—which nonetheless remains expensive and time-consuming to provide.”

NEXT: The proprietary product challenge 

There is also the emerging challenge of proprietary product sales being challenged in federal courts.

“I came from a large recordkeeper, so I have seen it firsthand,” Lacey recalled. “The point of mentioning this is that recordkeepers are stretched thin, and one cannot always expect that their requests to a provider will become a priority.”

Under Lacey’s leadership, the Stadion sales effort has actually turned its attention to working with smaller, open-architecture regional recordkeepers. “We love our current partners,” he said, “but it is also important to diversity distribution, like any company. There is still a lot of dynamism and success in the smaller recordkeeping market.”

For advisers, it is important to keep in mind what this set of facts seems to say about the future: There is a division going on in the recordkeeping arena that will result in a bifurcated market. It will be the very large national recordkeepers that survive, based on their scale, and it will be these smaller, boutique, highly nimble recordkeepers that are able to continue, based on the strength of their specialized offerings and reputation. Surviving between the two poles is already difficult and will only become more so in the years ahead, Lacey agreed. (See “Recordkeeping Market Evolution Marches On.”) Tied into this, Lacey also argued, is an ongoing trend pushing the DC plan industry toward the open-architecture recordkeeping model.

On the question of doing all this work in such an uncertain political, regulatory, judicial and legislative environment, Lacey agreed it adds another level of difficulty. But like many others who have spoken on the subject, he also feels the mass amount of uncertainty is causing providers to focus on what is certain—and that is the tried and true principles of running a quality business.

“Advisers in particular are on the front line of this issue; many have had to completely rethink their business model, and that is never going to be easy,” Lacey concluded. “When I had my advisory firm, we were already serving as an independent RIA [Registered Investment Adviser], and we were a fiduciary. That is where firms are clearly being pushed right now, and it will continue to be the case even if the fiduciary rule is delayed for some time, or even overturned.” 

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