Most of the coverage on Employee Retirement Income Security Act (ERISA) class actions has been focused on settlements or dismissals. Sometimes, however, the most telling detail and the true value to participants in settlement agreements is in the nonmonetary terms. Ironically, the nonmonetary relief is a methodology modification.
Look at two claims in the case of Cassell v. Vanderbilt University.
Breach of fiduciary duty of prudence: The plan sponsor/investment committee did not apply a viable methodology to choose and review recordkeepers.
Plan sponsors/investment committee members must develop and evidence a methodology to choose and review recordkeepers. Like choosing investments, recordkeepers must be chosen with participant best interests in mind. The Vanderbilt settlement agreement mandates that the school’s retirement plan committee must request recordkeeping proposals that include what the fees are on a per-participant basis. It seems like a viable methodology would attempt to decouple recordkeeping costs from asset size, especially if no additional services are provided. Given the size of the plan, one would think this should have been part of its methodology in the first place. I think the recommendation by Jerry Schlichter, the plaintiff’s counsel, makes sense here:
“… on or before April 1, 2022, the Plan’s fiduciaries shall conduct a request for proposals (“RFP”) for recordkeeping and administrative services for the Plan to at least three qualified service providers; the RFP shall request that any proposal for basic recordkeeping services express fees on a per-participant basis.”
In developing a methodology to choose recordkeepers, avoiding conflicts and other improper influences should be baked in. One must be particularly careful here because recordkeepers are making business decisions not fiduciary decisions. It’s no secret that recordkeeping fees are shrinking, especially for larger plans, so they may seek creative ways to achieve additional revenue streams. It becomes even more complicated, and worrisome, when a recordkeeper sorts through participants’ information and uses it to sell them additional unrelated services even though the participants never requested those services. The attorneys at Schlichter identify a protocol that can minimize such occurrences:
“… Vanderbilt University shall inform Fidelity, the Plan’s current recordkeeper, that when communicating with current Plan participants, Fidelity must refrain from using information about Plan participants acquired in the course of providing recordkeeping services to the Plan to market or sell products or services unrelated to the Plan unless a request for such products or services is initiated by a Plan participant.”
Breach of fiduciary duty of prudence: The plan sponsor/investment committee did not apply a viable methodology to choose and review investments.
Choosing recordkeepers, the appropriate recordkeeping cost structures, and investments can be a tricky proposition. These decisions should not be viewed in isolation, as they are interdependent and require diverse skill sets. Giving consideration to share classes with higher expense ratios should become highly unlikely if viable methodologies are applied to larger plans. When considering investments, in all cases, share classes with the lowest expenses have to be considered because they reduce participant returns the least. In most capitalizations, passively managed investment options with very low expenses consistently outperform their actively managed counterparts.
If passively managed investments with better performance at a lower cost to participants are available without revenue sharing and rebates, one may question any methodology that causes a plan to include revenue-sharing, rebates and an assortment of different share classes. And a second point to keep in mind: It can be difficult to explain in a way that can be understood multiple share classes to a retirement plan population, who have varying degrees of sophistication. It seems like it would only require the plan sponsor/investment committee to have additional skill sets and expose them to additional liability. As far as investments are concerned, the way the costs are structured and whether those trickle down to the participant to the detriment of his returns, is baked into the process of choosing the investment. Here, too, Schlichter’s team of attorneys has it right:
“… throughout the Settlement Period, the Plan’s fiduciaries shall, when evaluating Plan investment options, consider the cost of different share classes available for the Plan’s current investment options, among other factors.”
Conflicts of interest, inappropriate share classes, and recordkeeping fees that may be related to plan size or the compounding returns participants receive, are all outcomes of highly questionable methodologies. All who have an interest in employer-sponsored retirement plans—especially plan sponsors—should pay attention to the nonmonetary terms in class settlements.
Neal Shikes, Chartered Retirement Planning Counselor (CRPC), and managing partner at MJN Fiduciary LLC (The Trusted Fiduciary), has 30 years’ experience in financial services, wealth management, portfolio construction, and fintech. He is also a consultant/expert to the financial services industry and the legal profession on matters concerning the Financial Industry Regulatory Authority (FINRA)/suitability and ERISA/fiduciary duty. He is a guest writer for financial publications, articles and blogs and has been referenced by think tanks and financial associations.This feature is to provide general information only, does not constitute legal or tax advice and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services Inc. (ISS) or its affiliates.
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