Compliance February 28, 2024

FlexPATH, Wood Group Beat TDF-Selection-Based Lawsuit

A 401(k) complaint alleging fiduciary imprudence was rebutted in a 70-page review of the committee’s selection and review process.

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A California district court has ruled in favor of the defendants in a case brought by 401(k) participants alleging that the plan sponsor and investment manager breached their fiduciary duties by imprudently selecting and sticking with target-date funds affiliated with the 3(38) investment manager and plan adviser.

The case, Robert Lauderdale et al. v. NFP Retirement Inc. et al., was resolved on Friday by U.S. District Judge James V. Selna in U.S. District Court for the Central District of California, Southern Division.

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The initial complaint was filed by the Schlichter Bogard & Denton law firm on behalf of the plaintiffs in February 2021, naming plan advisory NFP, the retirement plan committee of Wood Group U.S. Holdings and 3(38) investment manager flexPATH Strategies LLC, which at the time was an affiliate of NFP. In November 2022, the court dropped NFP from the complaint.

The 401(k) participants alleged that, rather than acting in the best interest of participants under the Employee Retirement Income Security Act, the plan sponsor and NFP prioritized investing in collective investment trusts managed by NFP affiliate flexPath, as well as failing to use the plan’s size to bargain for lower fees. The result, the plaintiffs alleged, was “substantial losses to investments” in participants’ retirement accounts.

In his February 23 decision, Selna reviewed the allegations in a 70-page “Findings of Fact & Conclusions of Law.” Through the analysis of the various charges against evidence presented by the defense, he concluded that the plan sponsor and its advisers proved they had conducted the appropriate due diligence in selecting funds and managing the retirement plan.

Wood is an international consulting and engineering company in energy and materials, and the 401(k) plan had $2.66 billion in assets as of 2020, according to data from Beacon, which, like PLANADVISER, is owned by ISS STOXX.

The court had held a “nine-day bench trial” hearing the arguments of both sides from March 21, 2023, through March 29, 2023, and September 5, 2023, through September 6, 2023.

Thorough Analysis

In his findings, Selna went through the selection processes Wood’s retirement plan committee undertook in choosing NFP and the flexPATH investment options for plan participants; these included creating a finalist list of competitors and negotiating down fees.

“By the time flexPATH was hired in March 2016, [the Wood retirement plan committee] had already collected and analyzed a significant amount of information about the Wood Plan that informed its decision to select the flexPATH TDFs,” he wrote.

The judge went on to further describe the investment policy statement created by Wood’s committee, along with flexPATH’s ongoing review of its TDF offerings, which included BlackRock Inc.’s passive funds. The judge also considered how often the committee met and what was reviewed. The detail went as far as to note cancelled meetings, such as one intended for October 26, 2017, that did not happen due to the impact of Hurricane Harvey on the Houston area.

In going over the variety of allegations from the plaintiffs, Selna countered with evidence that the defendants had followed proper procedure under ERISA. Examples included:

  • The evidence showed that flexPATH did not receive additional compensation from the plan’s investment in the flexPATH TDFs;
  • The plaintiffs alleged that flexPATH selected the flexPATH TDFs because it needed seed money and to improve the marketability of the funds. However, the evidence showed that the flexPATH TDFs were fully seeded almost immediately after they were created;
  • The plaintiffs alleged that in December 2015, NFP formally announced a new program that incentivized NFP advisers to sell flexPATH by offering them bonus compensation whenever flexPATH TDFs were “implemented into” one of their retirement plan clients. But Selna found that the 3(38) management fee was not contingent on which funds were selected;
  • The plaintiffs alleged that there was no action taken on the underperformance of the flexPATH TDFs. But the flexPATH TDFs were performing as expected, given the inflation period. Selna ruled that the evidence showed that the Wood Committee appropriately considered and evaluated the reasoning behind the underperformance; and
  • The plaintiffs alleged that the Wood Committee never met with flexPATH. However, Selna noted, nothing in the law requires the Wood Committee to meet with its 3(38) investment manager; rather, it was compelled to monitor the TDFs’ performance.

Reasonable Decisions

Selna also noted at one point in the filing that a fiduciary’s duty, according to prior rulings, is not to “pick the best performing fund,” or the “cheapest possible fund available on the market,” but rather to show “a reasoned decision-making process” done through independent evaluation and with the appropriate methods “to investigate the merits of the investment.”

The plaintiffs were given seven days to file an appeal to the judgment, after which it will be filed in the Federal Rule of Civil Procedure 52(b), according to the filing.

Representatives for the plaintiffs did not immediately respond to request for comment. The Wood Group’s lead representation is Mayer Brown LLP, flexPATH’s is Seyfaqrth Shaw LLP, and NFP’s is Jenner and Block LLP, according to the court docket.

FlexPATH is no longer an affiliate of NFP, which itself is in an agreement to be acquired by Aon plc.

Client Service February 28, 2024

Creating an Exceptional Onboarding Experience for Your New 401(k) Clients

Retirement plan marketing expert Rebecca Hourihan lays out a winning strategy for new client onboarding.

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When was the last time you met with a prospect and their fiduciary files were flawless? You know, meticulously labeled file folders, color-coded tabs, impeccably detailed meeting notes.

Perhaps once or twice?

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Rebecca Hourihan

On the flip side, when was the last time you encountered a fiduciary whose files were a blend of trade secrets, inexplicably saved URL links and documents buried deep within email communications? It’s like stumbling upon a digital treasure trove where chaos meets dysfunctional order.

It’s no wonder that when you are the organized hero, you can guide the prospect toward a solid fiduciary path. It all starts with you.

Below are a few examples of how you can elevate the initial 30 days of a client relationship and enhance the onboarding process. These straightforward steps can help pave a clear path for bolstering client confidence and can help lay the groundwork for fostering a lifelong client advocate.

Establish an Agenda

Outline the key goals, tasks and milestones for the first month. This provides both you and the client with a clear road map, ensuring everyone is aligned on what needs to be accomplished.

Set Clear Plan Goals

To ensure that the retirement plan aligns with the client’s expectations, it is crucial to discuss goals and objectives. Conducting a discovery session can provide valuable insights into the client’s current retirement plan, goals and—most importantly—adviser and plan expectations.

An onboarding questionnaire or factfinder tool can aid in customizing your approach and services to meet the unique needs of each client. When your new client answers thoughtful questions such as, “What does plan success look like to you?” or, “A year from now, what changes would you like to see implemented?” they are giving you the keys to a successful relationship.

Preschedule Meetings

Setting a schedule for regular check-in meetings keeps the client updated and provides a forum to address any questions or concerns. By establishing a regular meeting cadence, you demonstrate your professionalism and ongoing commitment to your new client. Be sure to leverage the information you gathered with the onboard questionnaire to highlight how you are making progress on their specific objectives and expectations. 

Reviewing the Current Plan

A thorough review of an existing retirement plan can reveal its strengths and weaknesses. Understanding the current plan is crucial, especially if the decision is to transition to a new 401(k) recordkeeper. This enables you to identify potential areas for improvement and to develop solutions that address pain points.

As you know, retirement plan transitions can be overwhelming due to the involvement of numerous individuals, companies, new processes and the significant amount of time required. However, by setting clear expectations, providing a timeline and guiding the client through each step, advisers can reduce stress and frustration, ultimately providing a sense of confidence in the process.

This could include a sample transition plan and an explanation of common industry terms. For example, define who a recordkeeper is, explain what a blackout notice entails, provide instructions on setting up a fiduciary file and offer a high-level overview of what to expect.

Make the Connection

Each member of your team should send a LinkedIn connection request to your new clients. This personalized approach does more than just make the client feel valued: It expands your social media network and ensures your important updates appear in their newsfeed.

As advisers, you realize that plan sponsors are a diverse group of people and have different communication preferences. LinkedIn serves as an effective social news source, especially with older Millennial human resource directors who are savvy social media users.

So embrace the power of LinkedIn and let it enhance your client relationships, keep you top of mind and showcase your modern approach to financial services. Remember, every connection made is a step toward nurturing your future client base.

The First 30 Days: A Pivotal Period

The first 30 days of a client relationship are critical. This period sets the tone for all future interactions and should cultivate a positive client experience. The first month of onboarding should focus on building trust and understanding. This involves helping clients understand their plan, answering any questions they have and setting expectations for future interactions.

Keep Earning the Business

Winning a new 401(k) client is no small feat. It’s a clear reflection of your competitive advantage, industry knowledge and ability to inspire trust. But as we all know, in the world of 401(k) plans, signing on the dotted line is just the beginning. Now it’s time to deliver that top-notch service you promised during those finalist meetings.

Your new clients trust you. It’s imperative that their first experience—the onboarding process—is nothing short of exceptional.

Rebecca Hourihan is the founder and CMO of 401(k) Marketing LLC.

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