Compliance August 14, 2020

McKinsey Agrees to Settle Excessive Fee Lawsuit

In addition to a $39.5 million payment, the firm has agreed to a number of prospective steps to ensure reasonable expenses.

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Parties in a retirement plan excessive fee lawsuit filed last February have agreed to a $39.5 million settlement.

The original complaint named as defendants McKinsey & Co. Inc., MIO Partners and various John Does alleged to be fiduciaries under the Employee Retirement Income Security Act (ERISA). McKinsey sponsors two defined contribution (DC) retirement plans for its employees—the McKinsey & Company Profit-Sharing Retirement Plan and the McKinsey & Company Money Purchase Pension Plan. MIO is a registered investment adviser (RIA) firm wholly owned by McKinsey and is the plans’ investment manager by McKinsey’s appointment. MIO serves the plans by deciding which investment options should be selected and retained in the plans and also manages certain proprietary investment portfolios that it has retained as investment options in the plans.

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The plaintiff alleged that McKinsey and MIO made the plans “two of the most expensive—if not the most expensive—defined contribution plans in the country among plans of similar size.” According to the original complaint, as of 2015, the median annual cost of a 401(k) plan with more than $1 billion in assets was 0.27% of assets, and the 90th percentile mark was 0.51%. The plans’ annual cost was at least 3.74% of assets—more than 13 times the median and seven times the 90th percentile mark.

The complaint also states that MIO only gets paid if it offers its own proprietary investment portfolios in the plans, and that “MIO’s portfolios have high costs and are rife with other problems.” The plaintiff said MIO has failed to consider replacing its portfolios with superior alternatives. “Inclusion of MIO-managed investment options has enriched MIO substantially—since 2013, MIO’s annual compensation from the plans has ranged from $20 million to $36 million, or 0.64% to 0.94% of MIO-managed assets,” the complaint says.

McKinsey and its owners/partners were also accused of benefiting from the plans’ management. The complaint explains that McKinsey’s partners—current and former—have more than $4 billion invested with MIO through private funds outside the plans. “MIO routinely invests the plans’ portfolios alongside partners’ personal funds in order to subsidize or defray partners’ expenses in these funds. Indeed, the plans’ participants pay MIO annual management fees of close to 1% of the assets MIO oversees, yet MIO offers the exact same services, and makes the same investments, for McKinsey’s partners at no cost to the partners. As a result, the plans are effectively paying for the free investment services that MIO is providing to McKinsey’s partners. Had McKinsey’s partners simply paid their fair share of MIO’s expenses, the plans would have saved over $70 million in fees since 2013,” the complaint states.

In addition, the lawsuit alleged that McKinsey failed to appropriately monitor and control the plans’ recordkeeping expenses, and has paid a portion of these charges to itself. “Each participant pays approximately $95 per year or more for recordkeeping services (out of a total $160 annual administrative charge). This is more than twice the reasonable market rate for similarly sized plans (approximately $30 to $40 per participant), and McKinsey improperly retains around 25% of the recordkeeping charge for itself. Notably, while industry-wide recordkeeping expenses were cut in half on a per-participant between 2006 and 2016, the plans’ per-participant recordkeeping fee in 2017 was 50% higher than it was in 2006, despite significant growth in the number of participants that should have translated into lower per-participant fees,” the complaint says.

The defendants faced claims for breach of the ERISA fiduciary duties of loyalty and prudence and prohibited transactions under ERISA. McKinsey also faced a claim for failure to monitor other fiduciaries.

In addition to the $39.5 million payment, McKinsey has agreed to provide prospective relief, including:

  • For a period of no less than three years, McKinsey defendants will retain an independent investment consultant to provide ongoing review of the investment options in the plans, and review and approve any communications to participants regarding the plans’ investment options;
  • Also for a period of no less than three years, all expense reimbursements by the plans to McKinsey, MIO or any other affiliated person or entity will be reviewed and approved by an independent fiduciary—paid for by McKinsey—who will have final discretion to approve or reject reimbursements; and
  • Before the expiration of the current agreement between McKinsey and the plans’ recordkeeper, McKinsey will issue a request for proposals (RFP) for recordkeeping services.
The settlement agreement says it is not to be construed as evidence or admission of any wrongdoing by the defendants.
Data and Research August 14, 2020

Overwhelming Majority Doesn’t Have Emergency Savings to Last Six Months

More than half of Americans are earning half or less than half of their pre-pandemic income, and 31% have lost their entire income, a FlexJobs and Prudential survey has revealed.

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FlexJobs and Prudential surveyed 1,100 FlexJobs members and found that 62% said they do not have enough emergency savings to last six months. Forty-six percent said their savings wouldn’t last three months, and 24% said it wouldn’t even last one month.

Fifty-three percent said they are earning half or less than half of their pre-pandemic income, and 31% have lost their entire income.

While 24% said they were struggling financially before COVID-19 hit, that has now jumped to 44%. Conversely, while 21% of workers felt financially secure before the crisis, that has now fallen to 10%, according to the survey.

Forty-four percent of survey respondents said they do not earn enough money to achieve their financial goals. Thirty-five percent say the high cost of living is their main barrier, and 26% say it is having too much debt. Fifteen percent said they do not have access to workplace benefits, such as paid time off or health insurance.

As to what employers that have cut employees’ pay can do to help their workers, Carol Cochran, vice president of people and culture at FlexJobs, said they could offer highly performing workers a bonus. For workers taking care of children or the elderly, employers could give them stipends, Cochran says.

To make ends meet, 84% of those surveyed said they are taking concrete steps to shore up their finances until the pandemic ends. Nearly half, 49%, are searching for additional income streams such as a side job, 28% have filed for unemployment and 23% have dipped into their emergency savings. Twenty percent have reduced their retirement contributions, and 8% have withdrawn money from their retirement account.

To help workers who have taken withdrawals or loans from their retirement plan, Cochran suggests employers increase their match.

As to what workers who have had their pay cut or who have lost their job altogether can do, Cochran says they should start by cutting their discretionary spending and establishing a new budget. “There may be a series of seemingly small places to make cuts that can add up to make a difference,” she says. “Call your credit card companies to see if a lower interest rate is available to you. If you have a mortgage, is refinancing a viable option? This can save a significant amount of money in the long run.”

And, for all workers, regardless of their current financial situation, Julie Brandon, vice president and head of financial wellness distribution at Prudential, said it is imperative that they start—or add to—their emergency savings.

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