Compliance September 19, 2022

Goldman Sachs Did Not Violate ERISA Requirements, Court Says

The judge rules that there is no evidence that Goldman Sachs acted either disloyally or imprudently with its employees’ defined contribution plans.

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A federal judge has ruled in Goldman Sachs’ favor in a summary judgement that holds that the firm was not in breach of the fiduciary duty under ERISA to its employees invested in a defined contribution retirement plan maintained by the firm.

Leonid Falberg, an employee of Goldman Sachs from 1999 to 2008, filed a class action lawsuit in October 2019 alleging that Goldman Sachs had breached its duties of prudence and loyalty by maintaining five specific proprietary mutual funds in a larger menu of funds for enrollees to choose from.

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Falberg alleged that these funds underperformed and charged higher fees than reasonable alternatives, and that Goldman Sachs only maintained them on its menu because it would benefit Goldman Sachs to have its employees choose to invest in funds that Goldman Sachs owned and operated.

He further alleged that maintaining these five funds constituted a conflict of interest. These funds began to underperform in 2016, and Falberg maintained that Goldman Sachs took an unreasonable amount of time to remove them as a retirement plan option, and only did so after then-recent ERISA litigation signaled to the firm that these funds might be a litigation risk.

The conflict of interest and mismanagement, alleged Falberg, were disloyal and imprudent, and therefore constituted a fiduciary breach under Employee Retirement Income Security Act.

In July 2020, District Judge Edgardo Ramos of the U.S. District Court for the Southern District of New York denied a motion to dismiss filed by Goldman Sachs. 

Goldman Sachs moved for summary judgement in February. Ramos approved this motion and ruled in Goldman Sachs’ favor on September 14.

According to the ruling, the five challenged funds began to underperform in 2016, and Goldman Sachs asked its investment adviser, Rocaton, to explore alternatives to these funds at a quarterly meeting in September of that year. Goldman Sachs removed four of them in December 2016, and the last in June 2017. Additionally, two other proprietary funds that were not challenged by the suit were removed.

The ruling notes that Goldman Sachs maintained nonproprietary funds on its menu that underperformed its own, meaning that its own funds were not the worst-performing ones available.

Rocaton would rate various funds for Goldman Sachs as either “buy,” “hold,” “not broadly recommended” or “sell.” Falberg contended that Goldman Sachs should have removed the funds listed as “not broadly recommended” since funds rated as “buy” were available, but the ruling notes that Goldman Sachs was not advised to sell any of the challenged funds and kept nonproprietary funds it was advised to sell, suggesting the firm was not privileging its own.

Additionally, Rocaton had other clients who kept “not broadly recommended” funds available to defined contribution plan participants despite funds rated as “buy” being available as substitutes, so Goldman Sachs was not unique in this respect.

Both parties acknowledged that the Goldman Sachs committee members were qualified for the responsibility they held and had deep market expertise in their own right.

The judge noted that a conflict of interest is not a “per se breach,” and since there is no evidence that Goldman Sachs actually privileged its funds over others, this conflict does not represent a breach to its duty of loyalty.

Falberg also alleged that Goldman Sachs did not maintain an Investment Policy Statement. An IPS is a document that describes the process and investment goals that inform an organization’s investment decisions. In addition, he charged that the firm kept sparse minutes of meetings related to the plan, suggesting that it did not closely monitor or take interest in the options available.

Goldman Sachs countered that ERISA does not require fiduciaries to maintain an IPS, and that it is only a best practice. The absence of an IPS does not necessarily mean that it was not monitoring investment options. Secondly, minutes are not a transcript of meetings, and therefore not an indication that Goldman Sachs paid little interest to the funds. Detailed meeting minutes are likewise not required by ERISA, and thus a lack of them does not constitute a breach.

The judge sided with Goldman Sachs on both arguments, and noted that an expert witness called by Falberg conceded that an IPS is not required by ERISA.

The judge found that Goldman Sachs did not breach any fiduciary duty and closed the case.

Data and Research September 19, 2022

Satisfaction With Retirement Plan Digital Experience Falls

Retirement plan investors are ‘under a great deal of financial stress,’ and when they turn to their plan’s website or app, they are not finding what they need.

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Retirement investors feel their financial health is deteriorating, and many are concerned about their investments—but when they turn to their plan’s website or app for help, they are not finding what they need, a recent survey by the firm J.D. Power found.

Overall satisfaction is down 12 points (on a 1,000-point scale) this year, as 53% of retirement plan investors are now classified as financially unhealthy and 63% said they have challenges managing their accounts digitally, according to the 2022 U.S. Retirement Plan Digital Experience Study. Based on responses from more than 7,000 retirement plan participants and conducted in May and June, the study measures customer satisfaction across four factors: information and content; navigation; speed; and visual appeal.

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“Retirement investors are under a great deal of financial stress right now and they are looking to their plan’s websites and apps for information and guidance,” said Mike Foy, senior director and head of wealth intelligence at J.D. Power, in a statement. “Unfortunately, many are not finding what they need and end up having to call customer service for help. This is a moment-of-truth opportunity for plan providers. When they get the digital experience right, they see a very significant lift in the likelihood to grow and retain participant assets long after they have left their current employer.”

During the past year, the percentage of financially healthy retirement investors has dropped to 47% from 60%, with 28% now falling into the financially vulnerable category, the study found. Overall satisfaction with retirement plan digital experience has fallen 12 points, similar to the decline seen in financial health.

Strong digital performance is highly correlated with the acquisition and retention of retirement investor assets—highlighting the importance of how a good digital experience can help retain customers, the study says. Among top digital performers, 50% of investors said they “definitely will” keep their assets with their current provider in the event of a job change, versus 17% of investors with low-performing firms. With average job tenure for Millennials and members of Generation Z now hovering below three years, retaining investors through employment changes has become a top priority for retirement plans, the study adds.

Overall customer satisfaction with retirement plan digital experience rises 191 points to 671 when participants can complete tasks by themselves on their plan’s website or mobile app, the study says. However, just 37% of investors said they can manage their accounts digitally without contacting customer service.

According to the study, overall customer satisfaction rises 178 points when investors believe the retirement plan websites and apps offer proactive guidance and help, yet just 22% of firms evaluated are meeting this performance indicator.

Bank of America (including Merrill) and Charles Schwab rank highest in retirement plan digital satisfaction, in a tie, with a score of 704. Prudential Financial ranks third with a score of 696. Fidelity investments came in fourth with a score of 690, followed by T. Rowe Price with a score of 689. The industry average is 663.

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