Compliance February 21, 2024

Pennsylvania Federal Judge Orders RiversEdge Out of Retirement Plans

A judge determined the retirement plan recordkeeper and third-party administrator misappropriated millions in clients’ plan assets.  

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Updated with corrections

A Pennsylvania federal judge found RiversEdge Advanced Retirement Solutions fiduciaries pilfered retirement assets from seventeen defined contribution plans, and granted an injunction against the firm on February 20, in a preliminary order that accepted the actions requested by the U.S. Department of Labor.

The RiversEdge defendants refused to concede liability but consented to Judge Marilyn J. Horan’s preliminary injunction and the reforms requested by the DOL, for the duration of this litigation.

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The court ordered fiduciaries RiversEdge, president and CEO, Paul Palguta be removed from serving retirement plans as service providers to plans and from exercising any authority or control with respect to the 17 plans covered by the litigation or their assets.  

“Embezzling plan assets blatantly violates ERISA’s prohibited transactions provisions,” Horan wrote. “Parties with control over plan assets must not steal those assets.”

Additionally, Horan ordered—solely the Rule 19 defendants of the lawsuit—Mid Atlantic Trust Company, Schwab Retirement Technologies, Inc. and Charles Schwab Trust Bank to continue to recordkeeping and other services to the plans.

Outside of the Rule 19 entities, defendants have “essentially consented to the entry of a preliminary injunction,” where one of the decisive factors influencing a court order is the likelihood of the motion to succeed, explains Drew Oringer a partner in and general counsel at the Wagner Law Group, which was not involved in the litigation.

Fourteen of the plans RiversEdge fiduciaries stole from are Employee Retirement Income Security Act-covered plans, with the remaining three plans non-ERISA arrangements.

Horan found RiversEdge fiduciaries breached their fiduciary duties to retirement plans and their participants as recently as January 4, 2024, when the defendants engaged in prohibited transactions, transferring plan assets to the TPA’s account at PNC Bank and making a withdrawal of more than $180,000.00 in cash.

Horan determined several additional legal facts relevant to the lawsuit, agreeing with the DOL’s pleadings for legal remedy.

Horan wrote:

  • The RiversEdge defendants exerted authority over millions of dollars in ERISA plan assets;
  • The RiversEdge defendants misappropriated millions in ERISA plan assets;
  • The RiversEdge defendants accelerated their embezzlement since November 2023;
  • Absent a preliminary injunction, Palguta or RiversEdge could have access to client plan accounts at Schwab.

The orders mean, “basically, the DOL has the goods on [RiversEdge] and they’re just trying to get out as best they can,” says Susan Rees, of counsel at the Wagner Law Group.

At a February 14 preliminary injunction hearing, the RiversEdge defendants did not introduce any evidence or argument in response to the court’s order to show cause, Horan wrote.

Despite the order, “technically, the case as a whole is not over,” adds Oringer.

The retirement plans, individually or as a class action, may bring additional lawsuits under ERISA or under state law.

The initial lawsuit was brought by the DOL, January 26. The DOL had previously prevailed in court orders, earlier this month.

Examining the DOL’s pleadings, Horan found the plaintiff met the four-part standard established under the federal rules of civil procedure to demand the order be approved.

Horan won “a victory for the DOL,” on ERISA grounds, which the DOL “will vigorously continue to enforce,” explains Barry Salkin, of counsel at the Wagner Law Group, by email.

The lawsuit is Julie A. Su v. RiversEdge Retirement Solutions et al.

Representatives of RiversEdge, attorneys for the defendants and the DOL did not respond to requests for comment on the case.

Compliance February 21, 2024

What Does Regulation Best Interest Say About Rollovers?

The SEC has explained that advisers must have a reasonable basis to believe moving assets from a former employer’s plan to an IRA is a better option.

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The retirement security proposal, proposed by the Department of Labor in October, would apply fiduciary duties under the Employee Retirement Income Security Act to rollovers to individual retirement accounts, among other transactions. Opponents of this proposal say that the Security and Exchange Commission’s Regulation Best Interest has been regulating these transactions since June 2020, and the DOL proposal is therefore unnecessary.

What does Reg BI require when it comes to rollovers?

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Reg BI is a broad regulation enforced by the SEC that requires brokers and advisers to only recommend securities or strategies involving securities that are in the best interest of the customer. This does not require them to survey all securities available. They are required to tailor their advice to the needs of their client, mitigate and disclose conflicts of interest, and to be familiar with the products they recommend such that they have a reasonable basis to recommend it, among other requirements.

A staff bulletin published by the Securities and Exchange Commission in March 2022 noted that advisers must consider if a client would be better off keeping their assets in a retirement plan when recommending a rollover to an IRA: “it would be difficult to form a reasonable basis to believe that a rollover recommendation is in the retail investor’s best interest and does not place your or your firm’s interests ahead of the retail investor’s interest, if you do not consider the alternative of leaving the retail investor’s investments in their employer’s plan.”

The bulletin added that when recommending a rollover, “you would need to obtain information about the existing plan, including the costs associated with the options available in the investor’s current plan.”

Jay Gould, a special counsel with the law firm Baker Botts, says that he has not seen a lot of enforcement activity when it comes to Reg BI and rollovers, and adds that this is an “area that the regulators may want to provide additional scrutiny.”

The most recent enforcement action by the SEC under Reg BI was a $2.2 million fine imposed last week on a TIAA subsidiary for not disclosing lower-fee alternatives to clients investing in TIAA’s proprietary products. This action was not related to retirement plan rollovers.

Gould says that while the SEC regulates most rollover transactions it “could be a good idea to have a regulator come at the issue from the account side and not the investment side,” that is an approach that focuses on IRAs as such, and not the investments in them, because it could help mitigate conflicts in IRA-related transactions, especially when it comes to IRA providers that have proprietary products.

An adviser recommending a rollover under Reg BI would have to disclose fee structures within an IRA and the client’s existing retirement account and would need “to point out basic things,” such as expenses and available investments, Gould says.

Gould acknowledges, however, that examining these fee structures can be a labor-intensive process that might not be worth an adviser’s time if they fail to execute a rollover and earn a fee.

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