Compliance October 3, 2017

Fidelity Dismissed from Verizon Plan Investments Suit

Although the court dismissed claims regarding risky investments in TDFs and participant fee disclosure failures, Verizon still faces a charge regarding an underperforming investment.
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A federal court judge has dismissed claims against Verizon Communications retirement plan fiduciaries and Fidelity Investments over underlying investments in target-date funds (TDFs) and a lack of disclosures about revenue sharing in participant fee statements.

A participant in one of the Verizon retirement plans filed suit on her behalf as well as on behalf of participants in all of Verizon’s defined contribution (DC) plans, alleging Verizon created white label funds which include underlying funds and multiple layers of fess “that are nearly impossible for participant in Verizon’s plans to understand or evaluate.” The lawsuit specifically calls out target-date funds offered in the plans which include these white label funds as well as risky alternative investments.

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The lawsuit alleges that all the TDFs underperformed low-fee, passively managed TDFs offered by Vanguard.

U.S. District Judge Paul G. Gardephe of the U.S. District Court for the Southern District of New York found the plaintiff’s claims to be insufficient. First, Gardephe noted that regarding TDFs, the Department of Labor (DOL) requires a plan to offer a “broad range of investment alternatives” that are “diversified” and have “materially different risk and return characteristics.” He also noted that a year after alternative investment funds were added to the TDFs, the rate of return for the TDF actually increased from 13.47% to 15.50%. According to Gardephe, asset allocations of TDFs are not required to take into account risk tolerances, investments or preferences of an individual participant.

In addition, according to the court opinion, while the plaintiff offered two charts labeled “Verizon vs. Vanguard Target Date Funds” and “Verizon vs. Custom Index Target Date Funds,” neither demonstrates Vanguard’s superior performance and none of the referenced Vanguard funds is a target-date fund.

Finally, Gardephe said, “Decisions in which courts have allowed allegations of imprudence to go forward rested on allegations that the defendants selected certain funds out of self-interest or demonstrated clear imcompetence.” Neither was alleged in the case, so the judge dismissed this claim.

NEXT: Allegations Regarding Fee Disclosures

The plaintiff in the case claimed Verizon defendants and Fidelity breached their fiduciaries duties when Fidelity failed to disclose its compensation and Verizon failed to correct the failure per the DOL’s 404(a)(5) participant fee disclosure rules.

Gardephe found that under the regulations, where an investment fund offered in a plan transfers to the recordkeeper some portion of its fees (revenue-sharing), plan administrators need not disclose the exact amounts remitted to the recorkeeper. Instead the regulations instructs plan administrators to provide an explanation that some of the plan’s administrative expenses are paid from the total annual operating expenses of one or more of the plans designated investment funds, either through revenue-sharing arrangements, 12b-1 fees or sub-transfer agent fees. Verizon’s participant fee disclosure include such an explanation.

The plaintiff also alleged that Fidelity breached its duties under the Employee Retirement Income Security Act (ERISA) by making misrepresentations of fees on the plans’ annual Form 5500 reports. Gardephe found lower courts have ruled that participants lack standing to assert a claim based on an alleged misrepresentation in a Form 5500.

He dismissed this claim and as the plaintiff had not alleged that Fidelity had any fiduciary duty of participant disclosure of fees or with respect to filing Form 5500, Gardephe dismissed Fidelity as a defendant in the lawsuit.

A Win on the Prudent Investment Claim 

The plaintiff alleged that Verizon defendants breached their fiduciary duty with regard to the Global Opportunity Fund, which she says had “obvious and long-term underperformance over a ten-year period.”

Gardephe concluded that the plaintiff’s allegations were sufficient to state a claim. He noted that the complaints pleadings that the fund was a “core asset” of most of the Verizon plans’ investment options, that it wildly underperformed its benchmark over a ten-year period and barely surpassed the return of a money market investment, and that it charged an expense ratio higher than any other investment option available to participants were “sufficient to defeat a motion to dismiss.”

Products October 3, 2017

RiXtrema Launches Fiduciary Checklist

The checklist covers various fiduciary responsibilities including those not associated with supposed delays or changes to the fiduciary rule, RiXtrema says.
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Risk management tools and resources provider RiXtrema has released its DOL Fiduciary Rule Checklist to help advisers comply with the conflict of interest rule, which is currently undergoing full implementation.

“Every adviser who advises on retirement account assets as of June 9, 2017, is effectively an ERISA fiduciary who must adhere to Impartial Conduct Standard and charge no more than a reasonable fee,” explains RiXtrema President Daniel Satchkov. “It’s essential that advisers understand this and take necessary action to comply with the rule.”

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In addition to the requirements that Employee Retirement Income Security Act (ERISA) fiduciary status implies, advisers also must adhere to the Best Interest Document which contains specific data points regarding both employer-sponsored retirement plans and individual retirement accounts (IRA). These data points will show whether a rollover or IRA-to-IRA transfer is in the best interest of the investor, according to RiXtrema.

The Checklist contains seven sections addressing various documentation requirements. Each section covers specific questions with references to legislation. These sections include consideration of fees and expenses associated with the existing plan; consideration of investments, fees and expenses associated with the proposed IRA; consideration of the levels of services and investments available in a rollover, and considerations of risk suitability.

Questions in Section One include:

  • To satisfy this requirement, do your calculations include the fees of all of the types of investment vehicles in the current retirement plan portfolio, including collective investment trusts, separately managed accounts, group annuities?
  • To satisfy this requirement, do you make and document a prudent effort to obtain the latest form 404(a)5 disclosure with the plan administration fee information?
  • If despite prudent efforts you were not able to obtain a form 404(a)5 disclosure, do you use an exhaustive database of Form 5500 filings that gathers all fields both from Schedule I and Schedule H, where appropriate?

The firm notes that under the Department of Labor (DOL) fiduciary rule, any rollover is considered to be a “prohibited transaction.” Advisers who onboard IRA assets, since the promulgation of the rule on June 9, 2017, are required to document why the rollover is in the best interest of the investor.

Specifically, the DOL has says: “Although the documentation requirement is only specifically recited in the level fee provisions of the BIC Exemption, the documented factors and considerations are integral to a prudent analysis of whether a rollover is appropriate. Accordingly, any fiduciary seeking to meet the best interest standard as set out in the exemption would engage in a prudent analysis of these factors and considerations before recommending that an investor rolls over plan assets to an IRA or other investment, regardless of whether the fiduciary was a ‘level fee’ fiduciary or a fiduciary complying with the full BIC Exemption.”

After using the checklist, the adviser has the option of using RiXtrema’s IRAFiduciaryOptimizer to create a best interest documentation process.

“We can’t state forcefully enough that advisers must be fully engaged in complying with the rule,” adds Satchkov. “While there continues to be talk of delays in some areas of the rule, none concern the area addressed in the above DOL comment. Advisers who are not addressing this issue may incur liability due to ‘private right of action,’ which means that private parties can bring lawsuits as implied by the effective ERISA fiduciary status. Various delays by the DOL are distracting advisers, but it is important to understand that delays do not touch the core of the rule, which is fully in effect as of June 9, 2017. We are seeing that many advisers are starting to understand the landscape and the serious nature of their obligations. As a result, we are experiencing strong adoption of our IRAFiduciaryOptimizer by advisers wanting to ensure compliance.”

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