Compliance September 16, 2016

Participant Files Suit Over Advisory Fee Breakdown

A retirement plan participant accuses a well-known plan provider of delivering “no material services” in connection with certain advisory fees. 

Reported by

Plaintiff Lisa Patrico has filed a proposed class action suit on behalf of the Nestle 401(k) Savings Plan “and all other similarly situated qualified retirement plans,” under Sections 502(a)(2) and 502(a)(3) of the Employee Retirement Income Security Act (ERISA), targeting Voya Financial, Inc.

Other named defendants include Voya Institutional Plan Services, LLC; Voya Investment Management, LLC; and Voya Retirement Advisors, LLC. According to the broadly reaching complaint, the defendants provide services in connection with the administration of the Nestle 401(k) program and many others.

Get more!  Sign up for PLANSPONSOR newsletters.

The plaintiff lays out her argument as follows: “ERISA’s prohibited transaction rules prevent a plan fiduciary, which includes the investment adviser, from causing the plan to engage in various transactions with ‘parties in interest’ which also include the investment adviser—the so-called transactional prohibitions. The prohibited transaction rules also prevent the investment adviser, generally, from causing the plan to engage in a transaction that would generate additional fees for the fiduciary investment adviser—the so-called self-dealing prohibitions.

“As a result of these prohibitions and in the absence of any applicable exemption, a financial institution such as Voya—which provides, trust, recordkeeping, brokerage and other services to qualified retirement plans, as well as investment funds—could not provide investment advice to participants. Voya could not do so out of concern that advising participants to invest in Voya’s own funds would be a prohibited transaction in violation of ERISA § 406.”

According to the compliant, one common and obvious solution to this problem is to have the investment advice provided by a registered investment adviser (RIA) that is independent of and unrelated to the financial institutions whose funds were included as investment choices in the plan.

“This would ensure that the fund provider did not have a financial stake in the outcome of the advice,” the complaint suggests. In this case, according to the complaint, the independent RIA Financial Engines Advisors LLC (FE) “claims to fulfill that role, and FE has become the preeminent purportedly independent investment advice provider to 401(k) plan participants.”

The complaint goes on to suggest that Voya “determined to make available investment advice services to the participants of its customers’ plans. If, however, Voya were to allow such services to be provided through an independent and unrelated investment adviser, Voya would lose out on all the associated fees it could charge to participants.” Accordingly, in breach of duty, the plaintiff alleges Voya “devised a strategy that would satisfy the need for a supposedly independent investment adviser while preserving Voya’s ability to collect fees for the program: Voya offers the advice program through Voya Retirement Advisors LLC and charges a fee for the service, but subcontracts with Financial Engines to actually provide the investment advice.”

NEXT: Breaking down the allegations 

According to disclosures made to Nestle employees and employees of other employers whose 401(k) plans are administered by Voya, Voya Retirement Advisors charges each participant 50 basis points for the first $100,000 of the individual’s account managed by Voya Retirement Advisors, 40 basis for the next $150,000, and 25 basis points for amounts in excess of $250,000.

“As it turns out, Voya Retirement Advisors does not actually provide any material services in connection with the advice provided to participants,” the complaint alleges. “Instead, virtually all of the services in connection with the advice program are provided by Financial Engines. To be sure, Voya undertakes to make it appear that Voya Investment Advisors is materially involved in the process. The Nestle Savings Plan brochure announcing the advice program, which ... on information and belief was drafted at least in material part by Voya, states that the program is ‘powered by Financial Engines,’ but the associated footnote states: ‘Advisory Services provided by ING Investment Advisors, L.L.C. for which Financial Engines Advisors, L.L.C. acts as sub advisor.’”

The same footnote appears in Nestle Savings Plan participants’ quarterly statements that are “signed” by ING (now Voya) Investment Advisors LLC, according to the complaint.

The complaint continues: “Voya provides no material services in connection with the advice program, and the only reason for structuring the advice service as being provided by Voya with sub advisory services by Financial Engines is to allow Voya to collect a fee to which it is not entitled … There are alternative ways to view the true nature of this arrangement, all of which run afoul of ERISA’s fiduciary and prohibited transaction rules.”

From one perspective, according to the plaintiff, Voya has “interposed itself between the participants and Financial Engines and charged a fee simply, and unreasonably, to allow participants access to an advice program that is performed entirely or nearly entirely by Financial Engines. Voya pays Financial Engines only a portion of the fee being charged to participants, keeping the other substantial portion for itself …  From another perspective, Financial Engines, the true service provider, is charging the fees detailed in paragraph 10 above. Financial Engines then pays Voya a percentage of that fee. This arrangement violates ERISA § 406(b)(3), which prohibits a plan fiduciary from receiving any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan.”

Regarding the allegations, a Voya spokesperson shared this statement with PLANSPONSOR: “Voya denies any wrongdoing and intends to vigorously defend the litigation. As one of the largest providers of employer-sponsored retirement plans, Voya is committed to providing clear and comprehensive fee and expense information to our clients and their plan participants. We support transparency and candid communications about plan features and costs so that our clients can make informed decisions on choosing the plan solutions and services that offer them the best value. We value our clients and the trust they place in us. Voya Financial is dedicated to helping Americans plan, invest and protect their savings so they can retire better.” 

The full text of the complaint is available here.

Compliance September 16, 2016

What the Election Outcome Could Mean for Employee Benefits

Bruce Ashton, partner at Drinker, Biddle and Reath LLP, shared his thoughts at the 2016 PLANADVISER National Conference about what the outcome of the presidential election could mean for the employee benefits industry.
Reported by

Bruce Ashton, partner at Drinker, Biddle and Reath LLP, said if Hilary Clinton wins the election, the Senate may flip to Democratic control, but the House won’t. The fiduciary rule will go into effect; Obamacare stays, but Clinton will try to make tweaks; and there will be ramped up enforcement on service providers. Ashton said it may be difficult for Clinton to make tweaks to Obamacare if legislation is needed; Congress may fight her. He also noted that enforcement on service providers will not start immediately, but will happen over the course of her administration.

Ashton shared what Democrats have promised:

Get more!  Sign up for PLANSPONSOR newsletters.

  • Fight against any attempt to roll back the fiduciary regulation;
  • Fight to protect pension benefits in multiemployer plans;
  • Defend the rights of workers to collect their defined benefit (DB) pensions and make sure they get “priority and protection” when plans are in distress; and
  • Fight efforts to weaken Social Security and, in addition, expand it.

As for health care, Democrats have promised to:

  • Crack down on “runaway” prescription drug prices;
  • Fight efforts to roll back women’s health and reproductive rights;
  • Create a “public option;”
  • Permit those older than 55 to opt in to Medicare;
  • Empower states to create waivers under the Affordable Care Act (ACA) to develop locally tailored approaches to health coverage; and
  • Repeal the excise tax on high-cost health insurance.
NEXT: If Trump Wins

According to Ashton, if Donald Trump wins the election, Republicans will probably keep both the Senate and House. Obamacare will be gone. The fiduciary rule will be gone. Ashton questioned whether anything would replace them.

Ashton shared what Republicans have promised:

  • Cut taxes, which may reduce the incentive to save for retirement through workplace plans;
  • Consolidate and reform multiple different retirement savings provisions in the Internal Revenue Code—Ashton said this will likely impact 403(b)s and 457s the most;
  • Explore more general savings vehicles outside the employer based system and possibly in addition or lieu of IRAs.

As for health care, Republicans have promised to:

  • Repeal Obamacare; replace it with an approach “based on genuine competition, patient choice, excellent care, wellness and timely access to treatment;”
  • Return to the states the regulation of local insurance markets, limit federal requirements and promote a “robust consumer market;”
  • Cap non-economic damages in medical malpractice suits to lower health care costs;
  • Reform the FDA – Ashton says the idea is that the Food and Drug Administration is putting lives at risk by delaying the development of certain items.

“These are my thoughts, but anything could happen,” Ashton said, noting that “Whoever wins will have a significant impact on the benefits industry.”

«