Products February 21, 2024

Product Partnerships – 2/21/24

Morningstar Wealth announces addition of SMAs; Orion expands access to Clark Capital’s Navigator Total Wealth Strategies; SUBSCRIBE adds T. Rowe Price and Oak Hill Advisors to client roster.

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Morningstar Wealth Adds SMAs to the U.S. Wealth Platform

Morningstar Wealth announced the addition of third-party separately managed accounts to its U.S. wealth platform. The additions expand the range of investment choices advisers have to build portfolios and holistic unified managed accounts, according to the division of Morningstar Inc.

The third-party SMAs have been curated from asset management firms including AllianceBernstein, Congress Asset Management, John Hancock Investment Management, Lazard Asset Management, Putnam Investments and WCM Investment Management.

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“Morningstar’s dedication to empowering advisers is core to why we implemented a manager selection process leveraging our renowned manager research team to provide a curated selection of investments available on the Wealth Platform,” Cindy Galiano, managing director of U.S. Wealth Platform & Investment Solutions at Morningstar Wealth, said in a statement. “Here, advisers can readily access vetted investment options to best serve their clients, eliminating the need to navigate a vast marketplace.”

SMAs have experienced substantial growth in the investment landscape, doubling their assets under management to nearly $2 trillion since 2019, according to research Morningstar cited from Cerulli Associates. The consultancy expects this growth trend to persist, with SMAs projected to reach $3 trillion in the near future.

Orion Expands Adviser Access to Clark Capital’s Navigator Total Wealth Strategies

Orion Advisor Solutions has expanded adviser access to Navigator Total Wealth Strategies from Clark Capital Management Group, an independent asset manager, via its Orion Portfolio Solutions platform.

“We’re excited to expand adviser access to Clark Capital’s Navigator Total Wealth Strategies, offering more options to use their custodian of choice at Orion,” Ryan Beach, president of Orion Wealth Management, said in a statement.

These institutional quality strategies are actively managed, combining multiple strategies and asset classes into a single account. Strategies are available in five risk comfort zones and are available in tax-aware formats, according to the announcement. The strategies, previously exclusive to OPS clients who custody assets with Charles Schwab, are now also accessible for advisers with custody at Fidelity Investments.

“In addition to the strategies, advisers have access to our dedicated high-net-worth support team and time saving resources to help them grow and retain their business with affluent clients,” Chris Cullen, EVP and chief distribution officer at Clark Capital, said in a statement.

SUBSCRIBE Adds T. Rowe Price and Oak Hill Advisors to Client Roster

SUBSCRIBE, an operating system for alternative investments, announced that T. Rowe Price and its private markets platform, Oak Hill Advisors, have joined the SUBSCRIBE platform with the goal of enhancing digital onboarding and electronic subscription document workflow for their wealth management customers.

“Our enterprise platform solution offers leading wealth management firms a comprehensive pre-trade, trade, and post-trade suite of services to support the entire investment life-cycle of their private funds,” Rafay Farooqui, founder and CEO at SUBSCRIBE, said in a statement.

SUBSCRIBE’s platform allows wealth management firms and their financial advisers to transact and manage their alternative funds in one place, regardless of where those funds may have been sourced, according to the announcement. The platform centralizes investor data, funds and digitizes the fund investment workflows that financial advisers require to scale their allocations in the private markets.

“The streamlined platform of SUBSCRIBE will help retail investors unlock institutional-quality private credit access and the potential benefits that come with investing in the asset class, including premium yields and steady income,” Doug Keller, head of intermediary alternatives for T. Rowe Price’s U.S. Intermediaries division, said in a statement.

Data & Research February 21, 2024

Encore Fiduciary Finds Inaccurate Fee Benchmarking in 401(k) Litigation

Fiduciary expert says the plaintiffs’ use of Form 5500s to measure fees creates erroneous comparisons, and he recommends its new study for large plan fiduciary defense.

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Encore Fiduciary, a liability insurance underwriter, is promoting its new large plan sponsor benchmarking study as a way for fiduciaries to go on the offense when faced with 401(k) excessive fee litigation.

Encore, a division of Specialty Program Group LLC and recently rebranded from Euclid Fiduciary, discussed on Tuesday the results of a recordkeeping and benchmarking database for large plan fees; the firm first released the report in late January.

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Daniel Aronowitz

During the webinar, Daniel Aronowitz, president of Encore Fiduciary, showcased examples in which he argued that participant fees were exaggerated by plaintiffs as well as compared to unfair benchmarking—often resulting in multimillion dollar settlements by plan sponsors.

“The recordkeeping fees of most of plans are reasonable,” Aronowitz said on the webinar. “Fees paid are generally exaggerated or misrepresented, and [defense attorneys] have been responding by playing defense.”

Excessive fee cases have been a driver of 401(k) litigation in recent years. In 2023, 48 excessive fee and performance lawsuits were filed in 2023, a decline of 89 from the prior year, according to reporting from Encore.

On the call, Aronowitz pointed to the “original excess recordkeeping claim template” as starting in 2016, when 20 similar complaints were filed against universities for allegedly hiring recordkeepers that overcharged participants. In one complaint, Hughes v. Northwestern, plaintiffs alleged that a reasonable recordkeeping fee would be $35 per participant—a fee Aronowitz argued on the call was not an accurate benchmark.

Of those 20 complaints, Encore noted, 15 have been settled for a total of $152.9 million, or $10 million on average, four are still pending, and one was voluntarily dismissed.

“The premise of many, if not the vast majority of excess fee cases, that most large $500 million or more asset plans pay $35 or less is false,” Aronowitz said.

Unreliable Sources

At issue in defending such claims, according to Encore’s report issued with the benchmarking study, is that the U.S. Supreme Court, when hearing Hughes v. Northwestern, held that all excess fee imprudence claims based on circumstantial evidence “must be subjected to context-based scrutiny.” That has left defendants with the need for a “reliable, third-party benchmark.”

In recent 401(k) suits, plaintiffs have argued that plan fiduciaries have not followed their mandate because they have not sought out the lowest fees for participants, often showcasing both the fees charged, as well as benchmarks to lower options in the marketplace.

Aronowitz, however, argues that many plaintiffs are drawing on participant fee comparisons from Form 5500s as opposed to participant fee disclosures provided by recordkeepers. Those Form 5500s, he said, are not representative because they include other transaction fees.  

He also says that, when benchmarking, plaintiffs compare average fees that are “cherry-picked” and inaccurate to the large plan market.

Encore specifically pointed to three main strategies in excessive fee arguments:

  • Using the benchmark of small-plan recordkeeping data from a source called the “401k Average Book,” while “intentionally” leaving out the fact that the plans use indirect revenue sharing of over $150 per participant on average to fund recordkeeping fees, according to Encore.
  • Alleging that the country’s largest recordkeeper, Fidelity Investments, only charges participants $14 to $21 for recordkeeping services, a number cited in the discovery that Encore says is not a reliable average.
  • Comparing the fees from large plans with low fees by cherry-picking “random plans” that don’t represent the market.

Playing Offense

In its own benchmarking report, Encore drew on Department of Labor-mandated fee disclosures from over 2,500 large plans with assets exceeding $100 million, and over 1,000 participants for the years (2020, 2021, and 2022). Through its analysis, the firm found that large plans with $500 million to over $1 billion in assets pay more than $21 per participant for recordkeeping fees.

Encore’s report, based on 2022 data, reports fees by plan size of:

  • $500m-1b Plans: In 2022, 90% of plans with assets between $500m and $1b in assets paid over $35 per participant, with 80% of plans paying between $35 and $66 per participant.

  • $1b-5b Plans: In 2022, 90% of all plans with assets between $1b and $5b paid more than $26 per participant, and 80% of all such plans paid between $26 and $53 per participant.

  • $5b+ Plans: In 2022, 90% of all plans with assets over $5b paid $20 or more per participant, and 80% of plans of this size paid between $20 and $40 per participant.

“We took action to fill the void that the plaintiff bar is exploiting,” Aronowitz said. “Right now, we’re playing defense. We’re saying our fees are not excessive rather than showing that the fees being charged are right in the wheelhouse of what other firms are charging.”

During a question period on the call, Aronowitz said the firm would like to see its benchmarking incorporated into future motions to dismiss excessive fee claims.

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