Compliance March 16, 2015

County Says Consultant Responsible for Retirement Plan Bias

Baltimore County, Maryland, says it relied on Buck Consultants' advice, maintaining provisions of its retirement plan during litigation by the EEOC.
Reported by

In a recently filed lawsuit, Baltimore County, Maryland, says Buck Consultants, LLC has a contractual duty to defend, indemnify and hold harmless the county in connection with a lawsuit filed by the Equal Employment Opportunity Commission (EEOC).

The civil action EEOC v. Baltimore County, et. al. was brought in 2007 under the Age Discrimination in Employment Act (ADEA) and alleged unlawful employment practices on the basis of age because older employees were required to pay higher contributions than those paid by younger employees to receive the same benefits from Baltimore County Employees’ Retirement System (ERS). The action sought relief for Wayne A. Lee, Richard J. Bosse, Sr., and a class of similarly-situated aggrieved individuals at least forty years of age.

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

In its initial 2009 decision, the U.S. District Court for the District of Maryland held that the contribution rates were justified by the time value of money and were not motivated by age. But, the 4th U.S. Circuit Court of Appeals vacated this initial decision and remanded the case to the district court to consider the effect of a 20-year early-retirement option—a bargained for benefit that Buck had approved as compliant with the ADEA—and whether the disparate contribution rates were still supported by “permissible financial considerations,” i.e., the time value of money, in light of the early-retirement option.

On remand, the district court found that the early retirement option decoupled an employee’s age from years until retirement and that at no time were the contribution rates adjusted as they should have been- to take account of the early retirement option. The district court found that as a result of this failure to account for this early retirement option, the ERS was facially discriminatory under the ADEA. The district court therefore granted summary judgment in favor of the EEOC on the issue of liability. The 4th Circuit affirmed the district court’s decision. 

In the county’s lawsuit against Buck Consultants, it notes that Buck has been the principal actuarial consulting firm for the ERS since its inception in 1945. Over the course of the 70 years that Buck has been the actuarial consultant for the Baltimore County ERS they have provided advice as to the legality of various aspects of the ERS. When the county agreed to provide the 20-year early-retirement option to correctional officers, the change was specifically reviewed and approved by Buck as in conformance with all applicable laws.

Then, in the early stages of the EEOC litigation the county again asked Buck to review these provisions of the ERS and explain to the EEOC, on the county’s behalf, why the ERS was in compliance with the ADEA. By letter to the county’s director of Budget and Finance dated August 16, 2000, Buck provided that actuarial and legal advice, maintaining its position that these provisions of the ERS were lawful.

Baltimore County says it reasonably relied on this advice, retaining these provisions of the ERS, and maintaining—with Buck’s advice and consent—throughout the pending litigation that the ERS was in all respects in compliance with the ADEA.

According to the lawsuit, the advice provided by Buck was erroneous and the consultant breached its duty to provide competent actuarial and legal advice by failing to use due care when first reviewing and approving the early retirement revisions to the ERS, and then by affirmatively advising the county at the beginning of and throughout the pending litigation that these ERS revisions were in compliance with the ADEA. “As a direct and proximate result of these breaches, the County, through no lack of due care on its part, has been found to be liable and is now subject to civil damages,” the lawsuit states.

Contracts between Baltimore County and Buck stated: “The Contractor shall indemnify and hold harmless the County, its employees, agents and officials from any and all claims, suits, or demands including attorney fees which may be made against the County, its employees, agents or officials resulting from any act or omission committed in the performance of the duties imposed by and performed under the terms of this Agreement by the Contractor or anyone under agreement with the Contractor to perform duties under this Agreement.”

Based on this, the county advised Buck of the EEOC’s threat to sue the county for age discrimination, and asserted that Buck was contractually obligated to defend, indemnify and hold harmless the county in the event suit was filed. However, Buck’s counsel took the position that Buck was not obligated to defend, indemnify, or hold the county harmless in the pending litigation.

The consultant proposed, and the county agreed, that Buck and the county would “work collaboratively with the goal of having the County prevail in the lawsuit.” However, the county did not prevail on the liability issue and the EEOC lawsuit is now in the damages phase. The county once again called upon Buck to defend, indemnify, and hold harmless the county in connection with that damages phase and Buck refused.

Baltimore County is asking that the U.S. District Court of the District of Maryland stay the underlying litigation until the court has made its declaration in the county’s case. It is also asking that the court issue judgement that Buck is obligated to defend, indemnify and hold harmless the county in the underlying litigation, grant the county all costs and attorneys’ fees related to this action, and grant other relief as may be required.

A request for comment from Buck about the lawsuit was not returned.

The complaint in Baltimore County, Maryland v. Buck Consultants, LLC is here.

Investing March 16, 2015

Managed Accounts Show Little Fee Compression

Financial research and analytics firm Cerulli Associates finds managed account programs are more resistant to fee compression than other commonly used qualified default investment alternatives.
Reported by

A new report from Cerulli Associates explores one of the most frequently asked-about issues among the firm’s clients: Why has there been very little price change in the explicit fees consumers pay for managed accounts?

“Within the managed accounts practice at Cerulli, the questions most frequently asked by our clients relate to fees,” explains Tom O’Shea, associate director at Cerulli. “Since 2008, there has been very little price change in the explicit fees that consumers pay for subadvisory separate accounts, mutual fund accounts, rep-as-portfolio-manager services, and rep-as-adviser accounts.”

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

According to Cerulli, the explicit costs of all types of managed account programs, with the exception of unified managed accounts (UMAs), varied only three to six basis points between 2008 and 2014. In a sharp contrast, the explicit fee for UMAs dropped 20 basis points during the same time period. 

O’Shea notes Cerulli began tracking fees for UMAs in 2007, when the product category was fairly new and saw little competition between providers. “Since then, several firms have entered the space, including direct-to-consumer firms, which have driven down the explicit cost of UMAs,” he explains.

The Cerulli research indicates managed account clients are often confused by the fees they pay for advice—one potential explanation for why prices have remained steady—though the wider industry trend is toward greater understanding of the cost of advice. Interestingly, a 2014 survey by the firm shows 51% of consumers “were not sure how they paid for investment advice or thought they did not pay for it,” down from a high of 64% in 2010.

O’Shea feels new entrants into the managed account space “might heighten consumers’ sensitivity to fees,” and thereby kickstart more fee compression beyond the UMA category.

“Perhaps the most intriguing and powerful force to open clients’ eyes to the cost of investing has been electronic [registered investment advisers], or robo-advisers as they are dubbed in the trade press,” he says. “As these alternative approaches to financial advice grow in popularity, especially with the Millennial generation, they could slowly destabilize the equilibrium price for managed accounts.”

The findings are from the first quarter 2015 issue of “The Cerulli Edge – Managed Accounts Edition.” More information about obtaining Cerulli reports is here. 

«