Compliance May 6, 2020

Lawsuit Alleges Excessive Fees in Multiple Employer Plan

Though the plan’s recordkeeper is not named as a defendant, the lawsuit says fiduciaries of the ADP TotalSource Retirement Savings Plan allowed it to design an unfavorable investment menu for participants.

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McCaffree Financial Corp., a participating employer in the ADP TotalSource Retirement Savings Plan, has filed an excessive fee lawsuit on behalf of the plan and a class of similarly situated participating employers against ADP, ADP TotalSource Group, the plan’s administrative committee and its members, and NFP Retirement, the plan’s investment adviser.

According to the complaint, the plan is a multiple employer 401(k) plan sponsored by TotalSource. McCaffree and other similarly situated employers co-sponsor the plan for their eligible employees. As of December 31, 2018, the plan had 114,254 participants with account balances and assets totaling more than $4.44 billion, placing it in the top 0.1% of all 401(k) plans by plan size.

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As such, McCaffree claims it has “significant bargaining power and the ability to demand low-cost administrative and investment management services within the marketplace for administration of 401(k) plans and the investment of 401(k) assets.”

The lawsuit alleges the ADP defendants “have allowed unreasonable recordkeeping/administrative expenses to be charged to the plan; failed to adequately monitor the plan’s recordkeeper and its affiliates, who the ADP defendants have permitted to design an investment menu unreasonably favorable to them despite the recordkeeper’s clear conflicts of interest; and, along with NFP Retirement, selected, retained, and/or otherwise ratified high-cost and poorly-performing investments, when more prudent alternative investments were available.”

In a statement, ADP said, “We were made aware of this filing recently and are currently reviewing it.  TotalSource works diligently to fully and properly discharge all of its fiduciary and other duties.  We are confident that the ADP TotalSource Retirement Savings Plan offers an excellent retirement savings vehicle for our TotalSource clients and their employees.  As this is a matter of litigation, we cannot provide any further information at this time.”

NFP Retirement said it has no comment at this time.

The available investment options for participants of the plan include various mutual funds and a common collective trust, in addition to a self-directed brokerage account.

McCaffree says it has been unable to conduct a complete evaluation of the total plan cost (TPC) of the plan because expense ratios for five of the collective trust investment options are not publicly available. However, it says even a partial calculation indicates that the plan’s TPC is “outrageous and significantly above the market average for similarly sized and situated 401(k) plans.”

Specifically, the complaint says a Brightscope/Investment Company Institute (ICI) study published in June 2019 indicates that the average TPC for a plan with more than $1 billion in assets was 0.28% of net assets as of 2016. By contrast, it says the plan’s TPC, exclusive of the additional costs associated with those five collective trust investment options, ranges between 0.65% to 0.78% of net assets.

The complaint notes that the Form 5500s for the plan do not enumerate the share classes, so to be conservative, the calculations assume that the plan is invested in the least expensive share class for each fund where it is not explicitly stated.

Independent of the plan’s TPC, the complaint says the recordkeeping fees and administrative fees paid by the plan are, in and of themselves, “incredibly high.” It cites one industry publication which finds the average cost for recordkeeping and administration in 2017 for plans much smaller than the TotalSource plan was $35 per participant. McCaffree alleges that “given its size, and resulting negotiating power, with prudent management and administration, the plan would have unquestionably been able to obtain a per-participant cost significantly lower than $35 per participant.” However, the complaint shows that fees ranged from a low of $79.76 per participant in 2018 to a high of $124.28 per participant in 2014.

The lawsuit alleges that “the ADP defendants either engaged in virtually no examination, comparison or benchmarking of the TPC and/or recordkeeping/administrative fees of the plan to those of other similarly-sized 401(k) plans or were complicit in paying grossly excessive fees.”

Voya, the plan’s recordkeeper, is not named as a defendant in the lawsuit. However, the ADP defendants are accused of giving Voya carte blanche in designing the plan’s investment menu to permit Voya to extract the most fees possible.

“As the plan’s recordkeeper, Voya Financial was the beneficiary of the ADP defendants’ imprudence and/or divided interests. At the same time Voya was engaged as the plan’s recordkeeper, however, other Voya entities were extracting more fees in their capacities as investment managers to the plan. As described above, a significant portion of the plan has been invested in Voya-managed investment options throughout the relevant period, including the line of target-date collective trusts and other individual mutual funds. All of the Voya funds that the plan offers as investment options are proprietary funds, despite the fact that the plan could have, and should have, demanded non-proprietary funds to avoid any potential or realized conflicts of interest. … Voya’s affiliates are sub-advisers in its investment options. This poses potential conflicts of interest because Voya will receive more revenue when it selects an affiliated fund rather than an unaffiliated fund,” the complaint states.

The lawsuit also questions the use of actively managed funds, noting that 16 of the 28 investment options that defendants selected for the plan were actively managed. McCaffree says “these investment options could not consistently provide returns above their benchmarks, and even during the infrequent periods when they did exceed their benchmarks, the difference was not significant.”

In addition, the lawsuit says Voya’s target date collective trusts should not be offered as investment options in a plan of the ADP plan’s size. “Not only are they barely utilized in other retirement plans, their performance is lacking when compared to popular, cheaper target date alternatives, like the Vanguard Target Retirement Funds,” the complaint states.

The lawsuit not only includes a claim that the defendants violated their respective fiduciary duties under the Employee Retirement Income Security Act (ERISA) but includes claims that they failed to monitor other fiduciaries. To the extent that any of the defendants did not directly commit any of the breaches of fiduciary duties, the lawsuit says, at the very minimum, each defendant is liable as a co-fiduciary that knowingly participated in or concealed a breach by another fiduciary or enabled another fiduciary to commit breaches of fiduciary duty. Finally, it says, to the extent that any of the defendants are not deemed a fiduciary or co-fiduciary under ERISA, each such defendant should be enjoined or otherwise subject to equitable relief as a non-fiduciary from further participating in a breach of trust.

Data and Research May 6, 2020

EBRI Calls COVID-19’s Impact on Retirement Security ‘Manageable’

Certain actions by DC plan sponsors and participants can keep it that way, a conversation among professionals suggests.

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According to an EBRI issue brief, “Impact of the COVID-19 Pandemic on Retirement Income Adequacy: Evidence from EBRI’s Retirement Security Projection Model,” the impact of the COVID-19 pandemic on retirement savings shortfalls “appears to be manageable.”

EBRI says the $3.68 trillion deficit for all U.S. households between the ages of 35 and 64 increased by 4.5%, or $166.21 billion. With the combination of pessimistic assumptions in its analysis, the aggregate retirement deficits increased by 11.2% or $412.77 billion.

EBRI examined three possible sets of assumptions for the effects of the pandemic. In the optimistic set of assumptions, market losses are restricted to half of the first quarter of 2020 and job losses are modest. Plan sponsors and participants only modestly cut back on their defined contribution (DC) plan contributions, and participants only withdraw small amounts of money from their plans. In the intermediate scenario, market losses for the year are equivalent to first quarter 2020 losses accompanied by greater economic effects. In a pessimistic set of assumptions, market losses are equivalent to those that happened in the 2007-2009 financial crisis and economic effects are the most extreme.

EBRI says, “Market volatility may be largest factor during this crisis in increasing retirement savings shortfalls and decreasing savings surpluses, especially in a worst-case scenario. For the youngest workers, permanent termination of DC plans under $10 million in assets could have a large impact. Match suspensions by plan sponsors, contribution suspensions by workers, increases in withdrawals and decreased eligibility do not have as much impact when spread over all U.S. households.”

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The Society of Actuaries (SOA) recently launched an online conversation about the impact of COVID-19 on retirement risks. Participants in the conversation included actuaries, economists, attorneys, financial advisers, benefit plan sponsors, demographers, academics and policy researchers, among others.

In a primarily DC plan environment, individual investment decisions are critical, the SOA says, “but many workers lack investment confidence and knowledge to navigate the current market volatility.” It notes from the online conversation that default investment options offer individuals a path toward decision-making. Sources have confirmed that most DC plan participants invested in a qualified default investment alternative (QDIA) refrained from trading in the first quarter—preventing possible long-term damage to their retirement savings. The fact that 97% of plans with a QDIA use a target-date fund (TDF) as the QDIA offers hope that market volatility caused by COVID-19 will not greatly affect retirement savings shortfalls.

Early data suggests plan sponsors are reacting with moderation to the pandemic. PLANSPONSOR fielded a pulse survey of respondents to our 2019 Defined Contribution Survey April 7 through 10. Responses were received from 387 DC plan sponsors from a wide range of employer sizes. Overall, one-third of respondents that offer an employer match in their DC plans have discussed reducing or suspending it. Only 21% had already taken action to do so, while 13% said they are likely to take action.

As for employees withdrawing money from their DC plan accounts. EBRI estimates in an optimistic scenario, 6.6% of participants would withdraw money. In an intermediate scenario, 13.2% would withdraw money, and in a pessimistic scenario, 26.5% of participants would withdraw money.

In the online conversation facilitated by the SOA, those who gave input said hardship withdrawals and participant loans are likely to increase. This may be true considering that the Coronavirus Aid, Relief and Economic Security (CARES) Act waives the 10% tax penalty on newly created coronavirus-related distributions (CRDs), hardship withdrawals and in-service distributions for those younger than 59 1/2. The law also expands participant loan limits.

Conversation participants say if employees need to borrow and can borrow from a DC plan, it may be better than borrowing through a credit card or taking out a higher-interest loan. However, Alight Solutions has taken the position that taking a withdrawal is better for long-term retirement outcomes than taking a loan, in part because of the chance of loan default. Plan sponsors are also urged to consider factors other than the short-term financial needs of their employees before adopting new loan or distribution provisions.

EBRI says a future issue brief will explore the impact of the CARES Act on retirement savings shortfalls, factoring in the ability of affected workers to take much bigger loans and withdrawals than in the Great Recession.

“While employers and policymakers cannot control market fluctuations, they can be aware of the impact of plan sponsor and participant behavior on retirement income adequacy and develop approaches that can help mitigate damaging behavior today and position plans for robust utilization when the crisis ends,” EBRI says.

One thing plan sponsors may consider is plan design needs. Participants in the SOA conversation expressed concerns over whether DC plans offer sufficient retirement security. The pandemic has revealed the fragility of retirement security in the current landscape.

Findings from a Gallup survey show that Americans now expect to rely more on Social Security for retirement income. Polled between April 1 and April 14, 88% said they expect to rely on Social Security, up from 83% of those polled between April 1 and April 9 last year.

Gallup’s survey seems to indicate that, at this point, Americans agree with EBRI’s conclusion that the effect of COVID-19 on retirement savings is manageable. For one, Gallup says an indication that the COVID-19 economy isn’t rattling consumers’ long-term financial outlook comes from non-retirees’ estimate of the age at which they expect to retire, currently averaging 66. This is similar to the average expected age of retirement recorded each year since 2009.

In conclusion, Gallup says, “with most Americans still retaining their jobs and taking no hit to their income, many have yet to personally experience the economic effects of the COVID-19 crisis. As a result, their ratings of their current financial situation are down only slightly, and their concern about having enough money for retirement is up only slightly.”

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