The lawsuit filed in the U.S. District Court for the District of Arizona claims VALIC agents targeted plan participants for sales of certain annuities that they knew to provide no additional tax advantages, but subjected the participants to high fees and surrender charges on withdrawals.
The filing points out that tax-deferred retirement plans already offer the same tax advantages of the annuities—namely the ability to accrue earnings tax-deferred and to switch investments inside the accounts without triggering current taxation.
The suit seeks class-action status on behalf of all individuals who purchased an individual deferred annuity contract or who received a certificate to a group deferred annuity contract that was used to fund a qualified retirement plan under Internal Revenue Code sections 401, 403, 408, 408A, or 457 and issued by VALIC from January 1, 1974, to the present. The plaintiffs contend that they and other class members would not have purchased the annuities had they been informed during the sale that the tax-deferral benefit of the annuities is already provided by the retirement plans.
The suit alleges that VALIC agents were, in part, driven by the fact that they received lower commissions for selling more appropriate investment vehicles for retirement plans. The plaintiffs also claim that because VALIC agents call themselves financial advisers and not insurance agents, they and other class members were more likely to trust them.
Also named as defendants in the suit are VALIC subsidiaries Variable Annuity Marketing Company and VALIC Financial Advisor, Inc., VALIC Separate Account A, and various VALIC executives, including former chairman, CEO, and President John A. Graf. They are charged with fiduciary breaches and material misrepresentations and omissions.
The suit seeks compensatory damages for plaintiffs and class members, an order enjoining defendants from soliciting sales of the annuities for qualified retirement plans, an order enjoining VALIC from charging surrender fees for the annuities, and punitive damages.
In response to the lawsuit, VALIC said in an official statement: “Although we have not been served with this suit, we understand it alleges facts and claims that appear to be identical to another class action dismissed by an Arizona federal judge in 2005 and affirmed by the federal appeals court. As with that case, VALIC believes these allegations to be without merit.” The case referred to is James Drnek and Maureen Tiernan, et al. v. VALIC, et al.
Dabbling Out, Specializing In for MSSB Retirement Plan Advisers
As the defined contribution (DC) arena becomes more complex and competitive for financial advisers, Morgan Stanley Smith Barney (MSSB) is focusing its efforts on a lineup of retirement plan specialists.
“We don’t think that financial advisers will be able to dabble in this business,” Peter Prunty, head of Corporate and Business Retirement Plan Sales for Morgan Stanley Smith Barney told PLANADVISER. “And I think, particularly, we recognized in the current market that in the mid and large space the financial adviser who tries to dabble is generally not successful. The business is becoming more complex, more competitive.”
Going forward, Prunty said the company is structuring its business initiatives to train those less-specialized in retirement plans to get more experience and expertise as well as put more focus on financial advisers already successfully specializing in retirement plan sales and service. “It’s our expectation that with the fee disclosure requirements coming out, as well as some of the market changes that are being experienced amongst buyers in the market, that even down market into the smaller end you’ll see more of a tendency for specialized financial advisers to be those who are winning business consistently going forward,” Prunty said.
Specifically, MSSB has merged the retirement groups of Morgan Stanley and Smith Barney into a group of 135 to 150 financial advisers who are retirement plan specialists. The basic requirements to be considered as a specialist is that a financial adviser have at least $40 million in corporate retirement plan assets, that they have attained either the chartered retirement plan specialist (CRPS) designation or the PLANSPONSOR Retirement Professional (PRP) designation, and that they have a minimum production level of $500,000 annually. Even more important than the metric-based criteria is an assessment of whether the financial adviser is focused on the corporate retirement plan business, according to Prunty. In December they had close to 150 advisers in the group—but that number could expand as applications are processed, he said.
Prunty said the team supporting these advisers at Morgan Stanley Smith Barney focuses efforts giving these advisers differentiating tools, holds monthly sales calls with the group of advisers, and gives them direct access to wholesalers. “We’re also allowing them to take some certain responsibilities that other financial advisers within our organization can’t do with respect to retirement plans,” he said. “In particular, they have the ability to do consulting services and in some respects provide a fiduciary representation on covered assets, investments that the firm provides and approves through our consulting group.”
Advisers who are not specialists will still be able to have retirement plans, but will be encouraged to partner with specialist advisers. They will be required to work with specialists on larger plans; specifically, only the specialist advisers will be able to prospect those plans over $25 million at public companies.Regulatory Trends
Across the retirement plan advisory space, much of the movement toward more specialization is fueled by regulatory trends, particularly fee disclosure. MSSB’s model aims to stay on top of fee disclosure by focusing on training specialists who can then partner with non-specialists, said Rochelle Silverstrom, head of Corporate and Business Retirement Services for MSSB. “The landscape is clearly becoming more complicated and advisers will be required to understand and explain not only their own fees but the full scope of fees and revenues and will need to be able to articulate those to the client,” she said.
Silverstrom said the advantage of a large firm like MSSB is that advisers have access to a wide array of resources, working closely with legal teams, industry groups like SIFMA, and people in Washington to stay aware of pending regulations and get in front of them with best practices.
Another advantage a wirehouse like MSSB has over the independent model, according to Silverstrom, is the ability to leverage fund research capabilities. “We have the experience, the resources and a proven process in place to support advisers doing fee-based consulting,” she said.
While wirehouses can boast leverage and resources, the inability to provide participant advice can be cited as a criticism by some retirement plan advisers. Right now investment advice regulations are in limbo after the Department of Labor punted them (see “EBSA Pulls Back Controversial Advice Mandate”).
Currently, an MSSB adviser can provide fiduciary advice under the 401(k) Advisor program, an advisory program provided by Morgan Stanley Smith Barney with recordkeeping services provided by ING.
Silverstrom cited fee-based consulting capabilities and fiduciary capabilities as top goals for MSSB in the DC marketplace going forward. “That is the fastest growing segment right now, and we will continue to focus on it.” She also cited that it is a goal to continue to work closely with alliance providers and investment-only providers to support producers on the retirement side.
Going forward, retirement plan advisers will need to better differentiate themselves, Prunty said. “Clearly, with, again, the disclosures that are going to be easily discernable by the entire marketplace, a financial adviser is going to have to really add value for the client to continue to want to retain them as their financial adviser. So that’s going to be a focus of ours,” said Prunty. “And we’re also going to continue, just to be very clear, to train all those who aren’t in that specialist category so that they understand this marketplace.”