Compliance August 4, 2021

Plaintiffs in Excessive Fee Suit Overcome Hurdles to Move the Case Forward

The participants’ claims regarding Omnicom’s continued use of an active TDF suite were found plausible, and a judge left until later the issue of whether passively managed funds and actively managed funds are proper comparators.

Reported by

A federal judge has moved forward a consolidated lawsuit in which participants in Omnicom’s 401(k) Group Retirement Savings Plan allege plan fiduciaries violated their Employee Retirement Income Security Act (ERISA) fiduciary duties through a prolonged inclusion in the plan of certain funds and excessive recordkeeping fees and expense ratios.

As an initial matter, Judge Colleen McMahon of the U.S. District Court for the Southern District of New York determined that, because the plaintiffs could not have been harmed by any mismanagement of funds in which they did not invest by their own choice, they lack standing to bring allegations related to the plan’s offering of Neuberger Berman and Morgan Stanley funds. She dismissed claims regarding those funds.

For more stories like this, sign up for the PLANSPONSOR NEWSDash daily newsletter.

Most of the plaintiffs’ claims, however, concerned the active suite of the Fidelity Freedom target-date funds (TDFs), which was the plan’s qualified default investment alternative (QDIA). The lawsuit alleges that the active suite consistently underperformed the benchmark index suite of the Fidelity Freedom Funds, while charging much higher management fees, resulting in much higher expense ratios than comparable funds. Omnicom continued offering the active suite in the plan until sometime in 2019.

McMahon said she was unconvinced by Omnicom’s arguments that the plaintiffs’ allegations were not sufficient to plead a viable claim. She said Omnicom’s failure to adequately monitor the underperforming active suite, as well as its decision to continue offering it as the plan’s QDIA until 2019, raises an inference of imprudence. In addition, she said, the fact that the active suite underperformed the index suite in four out of six years “suggests that it was not a wise option when less expensive and better performing alternatives were available.”

McMahon also addressed the plaintiffs’ allegations that there were large net outflows from the active suite throughout the duration of the class period.

“Drawing all inferences in the plaintiffs’ favor, these facts admit of an inference that other asset managers felt that the active suite was not a wise investment and made decisions accordingly, while Omnicom either failed to monitor the situation closely enough or ignored the underperformance,” she said in her opinion. “At this stage of the litigation, this is enough to state a claim.”

McMahon pointed out that ERISA does not oblige Omnicom to select the best performing or least expensive funds for the plan’s investment portfolio. “The key is whether Omnicom’s process in making its investment decisions was imprudent,” she said.

Regarding excessive recordkeeping fees for the plan, the plaintiffs’ essential allegation is that, because the Omnicom plan is large, it has a strong bargaining position and should have been able to secure a much lower per-participant fee. McMahon said that whether Omnicom actually would have been able to secure a lower rate—or whether the $34 per-participant fee was reasonable—will be revealed during discovery. “But plaintiffs have alleged that Fidelity … charges a much lower rate to other, more comparable plans, which is enough to get them past this motion to dismiss,” the judge concluded.

McMahon also found the plaintiffs’ allegations that the plan charged excessive investment management fees across the board sufficient to state a claim. Omnicom argued that their allegations were insufficient because they compared expense ratios for passively managed funds to those of actively managed funds, and the two are not comparable. It also argued that the fees were not high because they were justified by their active management. However, McMahon said all plaintiffs need to allege at this stage is that the fees were excessive in comparison to similar funds. She also reiterated a point she made previously in her decision: “Whether passively managed funds and actively managed funds are proper comparators cannot be determined at this stage.”

Data and Research August 3, 2021

Keys to Facilitating Retirement Success

Guaranteed sources of income, low debt, a clear spend-down strategy and advisory services are four drivers of financial security in retirement, according to EBRI’s Retirement Security Research Center.

Reported by

Examining the Employee Benefit Research Institute (EBRI)’s recent “Spending in Retirement Survey,” the institute’s Retirement Security Research Center (RSRC) identified four keys to facilitating financial security in retirement for a variety of types of retirees.

EBRI used data from its survey to divide respondents into distinct groups based on their self-reported financial status and spending behavior. They are average retirees, who make up 28% of total respondents; comfortable retirees (22%); affluent retirees (19%); struggling retirees (18%); and “just-getting-by” retirees (12%).

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

In evaluating the retiree profiles, the RSRC found that the most salient drivers of retirement satisfaction and security appear to be having guaranteed sources of income, carrying low debt, having a clear spend-down strategy and having access to employer-sponsored retirement help, including advisory services.

In light of this, in a Point of View document, the RSRC suggests that plan sponsors, providers and policymakers might consider:

  • Adding a retirement tier—or defined contribution (DC) plan investments specifically designed for those near or at retirement—to investment choices;
  • Embedding institutionally priced, very low-commission annuities into the DC plan in such a way that they are automated for retirees; and
  • Rethinking how lifetime income illustrations can be used to reorient the way people think about their retirement savings. For example, such illustrations could show how a savings “floor” might be established as savings are drawn down. The illustration could show the impact of maintaining 25% of one’s balance, for instance, throughout retirement as one draws down savings. This could help retirees understand that spending in retirement is not an “all-or-nothing” proposition; it is possible to maintain a cushion and protection against late-in-life health care needs while still purchasing an annuity to have a guaranteed stream of income.

To address debt, the report says plan sponsors, providers and policymakers might consider:

  • Providing a more holistic view of retirement income security that includes debt management programs for pre-retirees and retirees;
  • Using technology to tailor messaging, tools and approaches for those with debt versus those without debt;
  • Educating pre-retirees about the reality of working in retirement. EBRI’s Retirement Confidence Survey shows that far more workers believe they will continue some sort of work for pay in retirement than what retirees actually report; and
  • Helping to create a better understanding of the importance of a mortgage-free home in retirement.

To facilitate a clear spend-down strategy in retirement, RSRC suggests plan sponsors, providers and policymakers might consider:

  • How to address the behavioral aspects of retirement spending. The report says help overcoming sticker shock could allow retirees to be more comfortable with spending down their assets.
  • Ways to help pre-retirees understand the realities of life in retirement so the prospect of retirement spending isn’t so daunting;
  • How to make the connection between health and wealth during the working years. Health savings accounts (HSAs) can act as retirement savings vehicles, providing another potential income source to retirees; and
  • Ways to create “spending paychecks.” The report says evidence from J.P. Morgan Chase research shows people manage their cashflow out of money that’s in their bank accounts. If regular income automatically flows from savings into a retirees’ checking account, it can make spending easier and increase spending confidence.

The RSRC said its partners that examined the EBRI survey—including asset managers, recordkeepers, insurance companies, banks, advisory firms and other retirement providers—focused on how to make advice more scalable so retirees with less assets have access to some level of financial assistance. They also discussed how the retirement tier could be harnessed to include embedded guidance or advice that provides support in a lower-cost, more scalable way. They noted that the traditional role of an adviser is not only one of guiding retirees’ investments but also of reinforcing retirees’ plans and helping them understand whether they’re on track or not.

The RSRC pointed out in its report that retirees’ paths may be set well before they reach actual retirement age. So, for example, addressing debt levels well before individuals approach retirement is crucial, as those facing retirement with unmanageable debt may be left with very few options to improve their situation.

«