Compliance October 28, 2019

Goldman Sachs Accused of Self-Dealing in 401(k) Plan

Among other things, the lawsuit says Goldman Sachs did not prudently use revenue-sharing payments.

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A participant in the Goldman Sachs 401(k) plan has sued the company, its retirement plan committee, and individual committee members, alleging they have breached their fiduciary duties and engaged in unlawful self-dealing with respect to the plan in violation of the Employee Retirement Income Security Act (ERISA).

According to the proposed class action complaint, the defendants failed to administer the plan in the best interest of participants and failed to employ a prudent process for managing the plan. Instead, plaintiffs allege, defendants managed the plan in a manner that benefited Goldman Sachs at the expense of participants.

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In a statement to PLANSPONSOR, Goldman Sachs said, “We dispute the allegations and intend to defend against the lawsuit.”

The lawsuit alleges that the defendants retained underperforming proprietary mutual funds that an objective fiduciary in their position would have removed. The funds did not outperform their stated benchmark indexes, and their performance only worsened as time passed. According to the complaint, while underperforming proprietary funds saw large redemptions from other investors, the defendants retained these funds in the plan, allowing Goldman Sachs to stem the consequences of further depletion of fund assets.

The defendants only removed proprietary mutual funds from the plan in 2017, after a series of legal rulings against other financial services firms highlighted their liability risk, the plaintiff alleges. He says the action was too late and the defendants have not reimbursed participants for the underperformance of the improperly retained proprietary funds.

The lawsuit also calls into question the defendants’ failure to obtain lower-cost separate accounts or collective trusts in place of proprietary mutual funds. For example, the complaint says, the plan remained invested in the Goldman Sachs Mid Cap Value mutual fund, which charged the plan between 0.73% and 0.76% of the plan’s balance during the statutory period, even though Goldman Sachs offered its institutional clients a separately-managed account utilizing the same investment strategy that would have cost at most 0.55% per year. According to the complaint, the defendants obtained lower-cost separate account or collective trust pricing for more than fifteen unaffiliated investment options in the plan, but appear to have made an exception for proprietary investments.

The plaintiff also says Goldman Sachs’ own plan paid more for proprietary mutual funds than other plans invested in the same funds. Until the end of 2015 or early 2016, the defendants invested in Institutional shares of proprietary mutual funds in the plan. The Institutional shares generally provided fee rebates (revenue sharing) of 0.05% to 0.10%, which other plans re-credited to participant accounts or used to offset administrative expenses. However, the defendants did not obtain the same rebates for the plan, the complaint states, and instead allowed Goldman Sachs to retain the extra 0.05% to 0.10% as additional revenue to the firm.

According to the complaint, the plan then continued to overpay when the defendants switched to a new share class of proprietary funds. Although the stated expense ratios for the new shares were 0.01% to 0.02% less than Institutional shares, the new shares offered no fee rebates. The plaintiff argues that if the defendants were to continue to invest in proprietary mutual funds, the best option remained Institutional shares with prudent use of revenue-sharing payments.

The plan has held approximately $5.5 billion to $7.5 billion in participant assets during the statutory period, and has consistently ranked as one the largest 100 defined contribution plans in the United States out of more than 650,000 such plans, the complaint states. The plan also had approximately 30,000 to 35,000 participants with balances at any time during the relevant period.

The lawsuit is seeking an order compelling the defendants to personally make good to the plan all losses that it incurred as a result of the alleged breaches and to restore the plan to the position it would have been if not for the alleged conduct. Among other things, it also seeks an accounting of profits earned by Goldman Sachs in connection with the plan, and a subsequent order requiring Goldman Sachs to disgorge all profits received from, or in respect to, the plan.

Compliance October 28, 2019

The Odds Are Split for Senate SECURE Act Passage This Year

“Overall, it is an uncertain picture, but the SECURE Act is not dead in the water,” says Bradford Campbell, former EBSA head from 2006 to 2009. “I would say it is a little less than 50-50 that it happens this year.”

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Bradford Campbell, as a partner in Drinker Biddle and Reath’s employee benefits and executive compensation group, spends a significant amount of time tracking and analyzing the progress of retirement-focused legislation in the nation’s capital.

Among other important topics, such as the Securities and Exchange Commission Regulation Best Interest project, these days he is in large part focused on the Setting Every Community Up for Retirement Security Act, commonly referred to as the “SECURE Act.”

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Campbell’s analysis benefits from the fact that he formerly served as an Assistant Secretary of Labor and as head of the Employee Benefits Security Administration (EBSA) from 2006 to 2009. During this time, he helped guide the implementation of the Pension Protection Act, or “PPA.” That law, passed in 2006 and implemented over the course of several years, dramatically changed the defined contribution (DC) plan landscape. Advocates of the SECURE Act say it will be the next big step to follow up on the PPA and create an effective DC-centric retirement planning system for the 21st Century U.S. workforce.

“Currently, our best hope for the bill, in my view, is that some version of it gets included in a big, end-of-year omnibus bill that includes some must-pass spending provisions,” Campbell says. “Overall, it is an uncertain picture, but the SECURE Act is not dead in the water. I would say it is a little less than 50-50 that it happens.”

Campbell agrees with other observes who argue the SECURE Act’s main hurdle is a lack of Senate floor remaining this year and ahead of the 2020 elections—rather than real substantial concern with the bill among the vast majority of lawmakers. Supposing Congress can’t get the SECURE Act through this year despite its mass bipartisan appeal, there remains a chance that the Senate could act on the bill in 2020.  

“While it is true that, prior to the presidential election next year, Congress could take another run at it, I believe the SECURE Act has a better chance in 2019 than 2020,” Campbell says. “Conventional legislative wisdom says that next year will very quickly start to be dominated by the election. The concepts here have gotten bipartisan support, though, so they will stick around in 2020. Eventually, I think some of these ideas will make it into law. It’s just hard to know what the vehicle will be and what the time frame will be.”

Like Campbell, the majority of observers say the SECURE Act’s holdup is more logistical than substantial. That is to say, with the GOP’s clear focus on making appointments to the judicial branch, there is actually a great premium on floor time for the remainder of this year. That’s why the Senate leadership initially pushed first for the SECURE Act’s passage under a loophole known as “unanimous consent.” In short, if a bill enjoys unanimous consent among every Senator, it doesn’t require any floor time.

At this juncture, it appears three GOP Senators are refusing to allow the bill’s passage under unanimous consent: Ted Cruz, Mike Lee and Pat Toomey. The word in Washington is that Senator Cruz has concerns about certain 529 college savings plan provisions. Senator Lee has concerns about a provision that provides some relief for small community newspapers. And Senator Toomey has primarily voiced concerns about certain technical tax corrections that impacts retailers, which he wants to see addressed through floor debate and amendment.

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