Compliance November 11, 2015

Novant Health Agrees to Settle Excessive Fee Suit

However, in a statement of non-opposition filed with the court, Novant said it disagrees with the claims.
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A settlement agreement has been filed in the U.S. District Court for the Middle District of North Carolina in a case against Novant Health over excessive fees and other fiduciary violations in the administration of its retirement plans.

The settlement calls for monetary relief in the amount of $32 million, as well as non-monetary relief, including that Novant will adopt a new investment policy statement and conduct a competitive bidding process for recordkeeping, investment consulting and participant education services for the plans.

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The lawsuit alleges that Great-West Life & Annuity Insurance Company, the administrative and recordkeeping service provider for the plans, received excessive compensation of approximately $8.6 million between 2009 and 2012. Additional payments received by Great-West from the investment companies providing the plan’s investment options constituted excessive amounts of revenue sharing, the compliant states, which amounted to “kick-backs.”

According to the complaint, D.L. Davis & Company, a registered broker of MML Investors Services, a subsidiary of the Massachusetts Mutual Life Insurance Co., was paid excessive fees up to $9.6 million between 2009 and 2012 in the form of “commissions.” The complaint states that D.L. Davis also received a second source of revenue in the form of “kick-backs” from the managers of the plan investment options.

NEXT: Novant disagrees with the claims

In a statement of non-opposition in support of the proposed settlement, Novant Health stated it disagrees with the claim that it breached its fiduciary duties under the Employee Retirement Income Security Act (ERISA) by maintaining retail class investment funds in the retirement plans rather than lower-cost institutional shares or other lower cost alternatives, causing participants to pay Great-West and D.L. Davis excessive fees. 

For example, Novant says the claims fail to consider the plans’ receipt and use of revenue sharing. The company maintains that revenue sharing was used to cover the costs of plan administration, so with the revenue sharing, the retail funds cost the same as, and in some cases less than, the institutional funds the lawsuit claims it should have offered. Novant also disagrees with the claims concerning fees paid, and says it engaged an outside consultant to review administrative services and fees.

However, it says the proposed settlement would provide a lasting benefit to participants without costly, years-long litigation.

Other non-monetary relief specified in the settlement agreement call for Novant to ensure that the plans’ administrative service providers are not reimbursed for their services based on a percentage-of-plan-assets basis, and review all current investment options in the plans and revise the investment options, as needed, ensuring that those options are selected or retained for the exclusive best interests of participants. The agreement also calls for Novant to remove D.L. Davis, and related entities, from any involvement with the plans; not enter into any new real estate or business relationships with D.L. Davis and related entities; not offer any Mass Mutual investments in the plans or any other investment that provides compensation to D.L. Davis and related entities; provide accurate communications to participants in the plans; and not offer any brokerage services to the plans.

Data and Research November 10, 2015

Research Finds Retirement Planning Calculators Lacking

HealthView’s research indicates that current income replacement ratio-based calculators fail to suggest sufficient income for retirees to afford quality health care and maintain their planned standard of living in retirement.
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Retirement savings based on income replacement ratio (IRR)-based calculators risk falling short of meeting retirees’ goals because IRRs significantly underestimate future retirement health care costs, says a HealthView Services white paper.

The paper, “Retirement Health Care Costs and Income Replacement Ratios,” highlights assumptions built into IRRs, reveals the shortfall in retirement health care savings when using IRR-based calculators and the additional savings required to close this gap.

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First, IRR-based calculators assume pre-retirement income is a good basis for calculating income needs in retirement, but HealthView’s research shows, when it comes to health care, this is not the case. IRR-based calculators also assume that household expenses in retirement can be projected forward using the general inflation rate of 2.5% to 3%; however, since health care costs are expected to rise at approximately 6% a year for the foreseeable future, IRRs will fall short on the savings that will be required to cover health care.

“IRRs provide financial professionals with a streamlined, top-down approach of assessing retirement savings and income goals without having to calculate and project individual line-item expenses,” says Ron Mastrogiovanni, founder and CEO of HealthView Services. “If they have saved for retirement using an IRR, most Americans assume they will have sufficient savings to cover their major costs. Many are in for a surprise when they find out that IRRs only cover a portion of estimated future health care expenses.”

NEXT: What is the gap?

“In fact, most employees only pay around 25% of their actual health care premium costs, while employers pick up 75%. In their first year of retirement, for comparable coverage, they will have to pay out of pocket costs around three times what they paid as employees,” adds Mastrogiovanni.

The white paper quantifies the retirement health care costs saving gap between what has been saved using an IRR and what will be needed to cover projected health care costs. It shows that a healthy 45-year-old male earning $50,000 and planning to retire at age 65 using an 80% IRR will face a shortfall of $127,299 in retirement health care costs.

This individual would be able to close this gap with additional annual contributions of $3,460 a year, or with a 50% company 401(k) match, an additional $90 per two week pay period. For a 55-year-old, eliminating the savings gap requires a $25,679 lump-sum investment or an annual additional contribution of $3,291 or $84 a pay period.

“Modest additional contributions to 401(k) plans, HSAs, Roths, annuities, or other products such as life insurance can help close this gap to reduce, or possibly even eliminate, the impact of unexpected health care costs in retirement,” says Mastrogiovanni.

The paper is available here. 

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