All posts by David Witz

$140 Million Settlement: What it Means to Your Retirement Plan Practice

[The following article by David Witz originally appeared on the eMoney Advisor blog and is reposted here with permission]

In December 2014, two parties in a high-profile ERISA fiduciary breach case filed a motion for the court to approve a settlement worth $140,000,000. This settlement is nearly 10-times greater than some other recent high-profile settlements. To date, this is the largest settlement ever in an ERISA fiduciary breach case involving the receipt of revenue sharing by a service provider.

The lawsuit was originally filed against the defendant in 2001 over an allegation that undisclosed revenue sharing payments from non-proprietary mutual funds were made in violation of ERISA. By no means is this an indication that group annuity contracts are prohibited from use or that the settlement is an admission there was any wrong doing or that the allegations are true. However, the settlement does include a number of action items that I suggest represent a blueprint to mitigate litigation risk for any retirement plan whether it is funded with a group annuity contract or a trust.

If you are an advisor that sells and services retirement plans, you need to consider adopting the following recommendations in your business. These recommendations will require the establishment of new documented processes and procedures that will add to an advisor’s labor burden but result in mitigated litigation risk.

  1. Present all products offered by a single-covered service provider (“CSP”) that your prospect or client qualifies to purchase. Typically, multiple products are tied directly to different pricing scenarios that should be communicated to the responsible plan fiduciary (“RPF”) in order to make an informed decision. Any changes that affect pricing after the buying decision is made should also be reviewed with the RPF within 60 days. Clients using Legacy products that have been replaced with more efficient and cost-effective contemporary solutions should be informed of the opportunity to adopt a better solution.
  2. If the CSP offers the same investment option in multiple share classes, present your recommended menu with each share class, or at least the book-ends to demonstrate each pricing scenario or range.
  3. Identify which investment options are proprietary, non-proprietary, and sub-advised, and identify the cost impact by using one type of fund over another.
  4. Disclose the gross and net operating expense ratio, the 12b-1, and any other indirect fee by fund. In addition, disclose the amount as a percent and dollar amount, who can receive it, and who pays it.
  5. Provide the RPF with an estimate of the revenue sharing expected for each fund at the beginning of the plan year and a final tally of the revenue sharing paid for each fund at the end of the year. The amount of revenue sharing paid should be compared to other platforms to confirm that the amounts received are competitive.
  6. Document the file for any investment option additions, removals, or substitutions added during the course of the contract year by the plan sponsor and the effect that will have on overall cost. Documentation must include affirmative consent to the investment change by the plan’s trustees or the investment manager. Investment changes imposed by the CSP, i.e., product vendor, must provide the RPF with the option to terminate the relationship.
  7. Provide access to this information on your website and store the information in a document lockbox.

Keep in mind that these recommendations are not legal requirements, though some are imposed specifically on the defendant as a result of the settlement agreement. To learn how PlanTools technology can assist with meeting these objectives contact David J Witz by email or at 704-564-0482.

Settlement Provides Guidance on Fiduciary Governance

Once the parties in complex litigation agree on the terms of a settlement, it is not common for a court to reject the settlement unless there is some profound error or injustice. As the the recent settlement in Goldenstar Inc. v. MassMutual Life Insurance Co. (see MassMutual Settles Excessive Fee Lawsuit) is very similar to past ERISA settlements including the recent one against ING (see ING Settles ERISA Class Action Lawsuit Over Revenue Sharing Practices) we anticipate the settlement will be approved. While a settlement holds no weight beyond the signatory parties, and here the class represented by the named plaintiffs, the terms of a settlement can be highly instructive to observers.

As such, a fiduciary should view this settlement as an opportunity to adjust internal policies, processes and procedures of their fiduciary governance as the issues raised in this case could affect how fiduciaries and service providers interact. For example, at the next fiduciary committee meeting or before signing a service agreement with any covered service provider (“CSP”), the following questions should be considered by the responsible plan fiduciary(ies)?

  1. Has the CSP provided us a list of all available investment options?
  2. Does our CSP provide a notice of any additions and deletion from the menu of options?
  3. Does any CSP have the discretion to remove an investment from the menu without the prior authorization of the responsible plan fiduciary?
  4. Has your CSP agreed not to delete, change or replace your investment options without providing the responsible fiduciary with 60 days advanced notice and their affirmative agreement to the change?
  5. Has the CSP agreed to provide the responsible plan fiduciary with a disclosure that identifies the operating expense ratios for each investment alternative along with the revenue paid (revenue sharing) by the investment alternative to any CSP other than for investment management services?
  6. Does the responsible plan fiduciary have the option to pay all plan fees except the operating expense ratio for investment management services directly from the corporate account versus deducting the fees from indirect fees passed to the CSP from the investment alternatives as revenue sharing?
  7. Does the responsible plan fiduciary have the option of using investment alternatives that do not provide any indirect payments to the CSP?
  8. Does the CSP have the discretion to unilaterally adjust their compensation?
  9. Does the responsible plan fiduciary require a description of any previous or active law suits or settlements resulting from litigation filed against the CSP?

By addressing these questions, a fiduciary can make an informed decisions based upon a documented process that will go towards addressing the procedural prudence required by ERISA.

Risk Mitigation Starts with Retaining Demonstrated Experts

by David J. Witz AIF®, GFS™ – February 17, 2014

It is widely understood that a plan sponsor that lacks expertise is obligated to seek the advice of qualified experts to assist them in their fiduciary duties. But to what extent can a plan sponsor rely on their expert’s advice? According to Clark v. Feder Semo and Bard, P.C., No. 12-7092 (D.C. Cir. Jan. 7, 2014), reliance on an expert is consistent with a fiduciary’s obligation to act with loyalty and prudence.  While this case focused on reliance on legal counsel, it provides important direction for both plan sponsors and service providers.   

The suit was filed on behalf of Clark, an attorney/employee/plaintiff, against her employer/law firm for assumptions used when calculating Clark’s distribution upon termination of the retirement plan. Clark argued that the plan’s fiduciaries were not entitled to rely on outside counsel’s advice but instead should have undertaken an “independent investigation.”

The D.C. Circuit ruled in favor of the plan sponsor. According to the court, the plan sponsor:

  1. “Properly” relied on the advice of outside counsel,
  2. Was “reasonably justified under the circumstances” to rely on counsel’s advice,
  3. Made a reasonable decision that any prudent trustee would have made under similar circumstances, and
  4. Made a prudent decision “based on the circumstances at the time of the challenged decision”

The court came to this conclusion based on ERISA’s adoption of the common law’s standard of fiduciary care in Section 404(a)(1)(B) which the court has interpreted to mean a plan sponsor can rely on counsel’s advice in “appropriate circumstances” when making important decisions. In coming to this conclusion, the court relied on several other decisions, including:

  1. Roth v. Sawyer–Cleator Lumber Co., 16 F.3d 915, 918 (8th Cir. 1994);
  2. Howard v. Shay, 100 F.3d 1484, 1489 (9th Cir. 1996);
  3. Bussian v. RJR Nabisco, Inc., 223 F.3d 286, 300–01 (5th Cir. 2000);
  4. Gregg v. Transp. Workers of Am. Int’l, 343 F.3d 833, 841 (6th Cir. 2003).

Important to all covered service providers (CSP) is the court’s conclusions in Clark that reliance on counsel’s (an expert) recommendation was “reasonable” because counsel:

  1. Had expertise in ERISA…the CSP was “qualified”
  2. Had been advising the plan since the 1990s…the CSP was “familiar” with the plan
  3. Had conducted a thorough review of the relevant documents…the CSP was “deliberate”
  4. Made recommendations based on a reasonable investigation…the CSP adopted “procedural prudence”
  5. Documented their recommendations…the CSP adopted “substantive prudence” and
  6. Made recommendations consistent with the plan sponsor’s understanding…the CSP was “collaborative”

Because the plan sponsor’s expert made recommendations based on procedural (process) and substantive (merits) prudence, the court concluded the plan sponsor did not need to conduct any further investigation as claimed by Clark. The moral of this case: there is value in retaining qualified expert CSPs. Unfortunately, many CSPs provide counsel to plan sponsors beyond their education, experience, or skills. There is liability for both the plan sponsor and the CSP in this situation. Plan sponsors should engage in a documented process to select their CSPs and CSPs should provide plan sponsors with validation they are capable of doing the job.

Bottom line, a plan sponsor should trust but verify and a CSP must not misrepresent their expertise. In fact, the court noted that a plan sponsor’s reliance on a CSP would be “improper” if there are “significant reasons to doubt the course counsel suggested.” This suggests that a plan sponsor should not blindly rely on their CSPs in all circumstances especially when they counsel a plan sponsor about issues they lack expertise in. This is when a plan sponsor is obligated to investigate or seek additional experts depending on the circumstances.