Compliance October 8, 2019

CareerBuilder Sued Over Excessive Fees for 401(k)

The complaint strongly points to revenue sharing payments between the plan and its recordkeepers and investment adviser, and says the plaintiff expects more excess to be revealed in the discovery process.

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A participant in the CareerBuilder LLC 401(k) Plan has filed a proposed class action lawsuit alleging that plan fiduciaries allowed the plan’s recordkeepers, ADP and Empower, and its investment adviser and/or trustee, Morgan Stanley Smith Barney, to receive excessive and unreasonable compensation.

CareerBuilder has not yet responded to a request for comment.

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According to the complaint, the provider received excessive compensation through:

  • direct “hard dollar” fees paid by the plan to ADP and/or Morgan Stanley;
  • indirect “soft dollar” fees paid to ADP and/or Morgan Stanley by mutual funds added and maintained in the plan to generate fees to ADP and/or Morgan Stanley;
  • fees collected directly by ADP and/or Morgan Stanley from mutual funds added and maintained in the plan to generate fees to ADP and/or Morgan Stanley; and
  • float interest, access to a captive market for 401(k) rollover materials to plan participants, and other forms of indirect compensation.

The plaintiffs say that while the hard dollar fees appear modest or misstated, it must be the case that the vast majority of ADP’s and/or Morgan Stanley’s and possibly others’ compensation came in the form of revenue sharing.

The lawsuit says it is estimated that the plan overpaid for administrative and advisory services by at least $1.1 million from September 30, 2013, to 2017. “In addition, it is expected that a review of data from 2018 and forward, after discovery, will show additional excessive amounts paid for administrative and advisory services during these years until the present,” the complaint says.

In addition, the plaintiff alleges that in order to provide for these revenue streams, the defendants larded the plan with excessively expensive mutual funds—to the exclusion of superior alternatives—which in turn paid ADP and/or Morgan Stanley out of the excessive fees they collected from plan investments.

The plaintiff says these mutual funds collectively underperformed superior alternative funds for a variety of reasons, including the fact that the alternatives charged lower fees by, among other things, removing the additional payments to ADP and/or Morgan Stanley. In the complaint is a table that the plaintiff says shows nearly 80% of the investments listed paid fees that were well over 40% higher than they should have paid for the identical product.

“In addition, it is expected, once complete data is available, the numbers will show that revenue sharing on these funds were between 18% to over 30%. Revenue sharing at this level, shows a lack of any prudent process for monitoring these funds. Clearly, had there been a prudent monitoring process in place, the majority of these funds would have been replaced with less expensive alternatives as early as September 30, 2013,” the complaint says.
Administration October 8, 2019

Could GE Have Continued Its DB Benefits?

GE is freezing pension plans and offering a lump-sum window to certain former employees, but John Lowell, with October Three, questions whether a design-based solution would have helped the company continue to offer DB benefits to employees.

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GE announced it is taking three actions related to its U.S. retirement benefits as part of its strategic priority to improve its financial position.

The company is freezing the U.S. GE Pension Plan for approximately 20,000 employees with salaried benefits, and U.S. Supplementary Pension benefits for approximately 700 employees who became executives before 2011, effective January 1, 2021. It is also pre-funding approximately $4 billion to $5 billion of estimated minimum Employee Retirement Income Security Act (ERISA) funding requirements for 2021 and 2022.

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GE is also offering a limited time lump-sum payment option to approximately 100,000 eligible former employees who have not started their monthly U.S. GE Pension Plan payments.

In total, the actions announced are expected to reduce GE’s pension deficit by approximately $5 billion to $8 billion and industrial net debt by approximately $4 billion to $6 billion. At year-end 2018, the plan’s funded ratio was 80%, under generally accepted accounting principles (GAAP). After distribution of the lump sum amounts, the company expects to record a non-cash pension settlement charge in the fourth quarter of 2019, which will be determined based on the rate of acceptance.

Kevin Cox, chief human resources officer at GE, said, “Returning GE to a position of strength has required us to make several difficult decisions, and today’s decision to freeze the pension is no exception.  We carefully weighed market trends and our strategic priority to improve our financial position with the impact to our employees. We are committed to helping our employees through this transition.”

John Lowell, Atlanta-based partner and actuary for October Three, notes that GE has taken steps that a number of other large organizations have taken. He concedes that without knowing what other options GE may have considered or were presented to the company, it’s not possible to decide if this was the optimal solution for it. However, he says, “In our discussions with defined benefit sponsors in similar situations, we’ve often apprised them of options that don’t result in an exit from the defined benefit system, but do serve the purpose of limiting volatility in liability growth and in cash and accounting costs. Such design-based solutions may become a wave of the future once employers see that perhaps better results can be achieved by staying in the DB system.”

According to Lowell, traditional risk transfer solutions smooth out the financial effects of a defined benefit, but they do so at a substantial psychological cost to those employees who are depending on lifetime income. “If a company has been in the defined benefit arena for as long as GE, then what they have essentially done is made a commitment to providing lifetime income solutions at a fair price to their employees. What has driven many companies away from this is not the lifetime income concept, but the volatility and unpredictability of the costs of defined benefit.”

One suggestion for a design-based solution is a market-based cash balance plan, according to Lowell. “It gives employees the opportunity to get to choose between lump sums or fairly priced lifetime income (within the plan) and they do so with cost predictability and stability for the employer. In my opinion, it’s the design that forward-thinking employers will be looking at for the next generation. The key about market-based cash balance is that it eliminates most of the unwanted volatility.”

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