In Practice October 2, 2017

Fiduciary Rule Creating Opportunities for Advisers to Small Plans

Many sponsors in the mid- and small-plan market, facing pressure from participants and regulators, are seeking DC specialist advisers for the first time.
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The Department of Labor’s (DOL) pending fiduciary rule is just one of many factors causing smaller retirement plans to seek out the services of specialist retirement plan advisers, says George Revoir, head of distribution for John Hancock Retirement Plan Services in Boston.

Related to this trend, broker/dealers are enhancing their service offerings to provide non-retirement specialists with more tools and protections so that they can effectively act as fiduciaries to these plans, he says.

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Many small plan sponsors are beginning to realize that the advisers currently servicing them are commission-based brokers, not necessarily fiduciaries, causing them to look for help with the fiduciary rule and participant education, agrees Chris Schaefer, head of MV Financial’s retirement plan practice in Bethesda, Maryland.

“Small plan sponsors are beginning to question what value their adviser brings to them, particularly if that adviser is not acting as a fiduciary,” says Matt Wolniewicz, president of Fi360 in Chicago. “They are now realizing that, rule or no rule, their adviser needs to look out for their best interest.”

“For advisers, this means upping their game and operating as a 3(38) fiduciary to plan sponsors, formally acknowledging their fiduciary responsibility in writing and taking on all the responsibilities for the due diligence, selecting and monitoring of the investments,” says Edward Dressel, president of Retire Ready Solutions in Dallas, Oregon.  “For advisers who combine these duties with participant education, the outcomes can be extraordinary.”

But there are challenges in servicing small plans, the experts say. Advisers who move to the small plan market need “scalable solutions to deliver across multiple plans, as opposed to serving uniquely individualized jumbo plans,” Revoir says. As well, the Department of Labor restricts marketing  communications to plans with less than $50 million in assets, says George Michael Gerstein, counsel at Stradley Ronon Stevens & Young in Washington, D.C. “If, as part of your marketing, you recommend a security or product, the DOL considers that a restricted recommendation,” Gerstein says.

Marc Caras, head of the Retirement Plan Network at Pershing in Jersey City, New Jersey, says specialist retirement plan advisers are beginning to move up market, creating opportunities for more novice advisers to enter the small and micro market. This is why firms like his are creating tools for advisers in the small and micro market, such as the Retirement Plan Network, Geli says.

“It provides the adviser with access to professional recordkeeping data that is integrated with the workstation,” he says. “It shows the adviser plan level and participant level data to give them a better opportunity to understand a plan’s demographics and to service the plan. Another tool that we will launch in early 2018 for the small plan market is a plan oversight tool that will enable advisers to monitor up to four sets of requirements.”

John Geli, president of DST Retirement Plan Solutions in New York, says he sees tools being developed for advisers in the small market in four areas, the first being retirement plan analytics to assess plan health and suggest ways advisers can improve plan design and retirement participant outcomes. “There are also practice management tools, such as our Plan Investment Plus, which provides advisers with the information they need to be in compliance,” Geli says.

The third area includes tools to help advisers aggregate all of their books of business, and the fourth area are retirement income and financial wellness tools. “If the newer advisers take advantage of these types of tools, they will be able to effectively service small plans,” Geli says.
Compliance October 2, 2017

Fidelity Found Not Liable in Excessive Fee Suit

Participants of the of the Delta Family-Care Savings Plan sued Fidelity entities regarding excessive fees charged for the plan’s advice offering as well as its self-directed brokerage account (SDBA) option.
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U.S. District Judge Allison D. Burroughs of the U.S. District Court for the District of Massachusetts has granted to Fidelity Management Trust Company and Fidelity Investments Institutional Operations Company a motion to dismiss a lawsuit for failure to state a claim.

The defendants were sued by participants of the of the Delta Family-Care Savings Plan regarding excessive fees charged for the plan’s advice offering as well as its self-directed brokerage account (SDBA) option.

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The court basically decided that Delta is the fiduciary responsible for choosing to provide the advice and SDBA offerings to participants, not Fidelity.

The lawsuit alleges that, in order to be included as the investment advice service provider on Fidelity’s platform, Financial Engines agreed to pay—and is paying—Fidelity a significant percentage of the fees it collects from 401(k) plan investors, and these fees are not being paid for any substantial services being provided by Fidelity to Financial Engines or to participants of the plans. In addition, the lawsuit claims that when participants in the plans invest through Fidelity’s SDBA program, BrokerageLink, and the mutual funds selected by the participants offer more than one share class, Fidelity does not always acquire the class of shares with the lowest expense ratio.

The defendants moved to dismiss a claim regarding the SDBA for lack of subject matter jurisdiction, which the court denied. Fidelity argued that by selecting a ticker symbol for the vehicle in which to invest, the plaintiff who alleged injury was responsible for selecting the share class of the vehicle in which to invest. The plaintiffs in the case acknowledge that investors do indeed “choose” the share class, even if only in a “purely mechanical sense,” but argue that the defendants remain liable under the Employee Retirement Income Security Act (ERISA) because BrokerageLink does not always offer investors “a meaningful choice of share class, such that the investor is free to choose the lowest cost share class for which that investor may be qualified.” Burroughs said, “Thus, this is not a case in which ‘no colorable hook exists upon which subject matter jurisdiction can be hung.’”

NEXT: Dismissal for Failure to State a Claim

Regarding Fidelity’s motion to dismiss for failure to state a claim, Burroughs said first, the court must “distinguish the complaint’s factual allegations (which must be accepted as true) from its conclusory legal allegations (which need not be credited).” Second, it “must determine whether the factual allegations are sufficient to support the reasonable inference that the defendant is liable.”

According to the court opinion, the plaintiffs’ current theory of BrokerageLink liability seems to be that the defendants breached their fiduciary duty to the plan by “selecting” only higher-cost share classes to be available through BrokerageLink, while leaving out lower-cost share classes, and thereby maximizing their revenue-sharing payments at the expense of plan participants.

Burroughs found that according to Schedule C of the Master Trust Agreement, the Delta committee, as named fiduciary, “direct[ed]” the defendants that individual accounts could be invested in a list of 28 funds or products, one of which was BrokerageLink. She said this language makes plain that the Delta entities, not the defendants, retained control over whether BrokerageLink—and by extension the classes of mutual fund shares offered through it—was made available to plan participants. “There is no suggestion in the complaint that Delta lacked the authority or ability to leave BrokerageLink off of Schedule C if it determined that the share classes offered through BrokerageLink were unsuitable for plan participants,” Burroughs wrote in her opinion. “Accordingly, defendants did not exercise the type of authority or control over the decision to include BrokerageLink in the plan that would give rise to ERISA liability.”

Burroughs said allegations relating to the use of investment advisor Financial Engines runs into similar difficulties. The plaintiffs claim that the defendants acted in a fiduciary capacity by hiring Financial Engines and controlling the negotiation of the terms and conditions under which Financial Engines would provide its services to plan participants and by selecting Financial Engines as an investment advice provider for plan participants.

“This theory is premised on the notion that defendants, rather than Delta, hired or selected Financial Engines as an investment advice provider for plan participants,” Burroughs wrote, “but the Master Trust Agreement contradicts this premise.” She found that the agreement states that the “Named Fiduciary” (the Delta Air Lines, Inc., Benefit Funds Investment Committee) “may also appoint an investment manager” and “has so appointed Financial Engines with respect to assets held in the individual Plan accounts of Participants enrolled in Professional Management.” It also states that the “Trustee” (FMTC) “shall have no responsibility” for the decision to offer such a service.

Burroughs also noted that courts have held that plan service providers are not acting in a fiduciary capacity when they negotiate with plan sponsors for their own compensation, so long as the final agreement with the plan does not give the service provider the ability to determine or control the actual amount of its compensation. The critical inquiry is who controls the “decision whether or not, and on what terms, to enter into an agreement” with a service provider. Absent authority or control over that decision, a service provider “is not an ERISA fiduciary with respect to the terms of the agreement for his compensation.” She added that the complaint does not allege that, once Financial Engines was hired, the defendants retained any authority or control over the rate of compensation it would receive from Financial Engines.

“To the contrary, the complaint and the incorporated Master Trust Agreement indicate that defendants’ fee-sharing agreements pre-dated their involvement with the plan,” Burroughs wrote.

She allowed the defendants’ motion to dismiss for failure to state a claim.

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