Compliance January 22, 2018

Third Complaint Against NYU 403(b) Plan Adds Adviser as Defendant

Allegations against Cammack LaRhette Advisors contend it gave “flawed advice” to plan fiduciaries regarding investments, which Cammack denies.

Reported by

Participants in New York University’s (NYU) retirement plans have filed a Third Amended Complaint, for the first time naming Cammack LaRhette Advisors as a defendant in the lawsuit.

Allegations in the complaint are basically the same as in the last one: that instead of using the plans’ bargaining power to reduce expenses and exercising independent judgment to determine what investments to include in the plans, the defendants squandered that leverage away by allowing the plans’ conflicted third-party service providers—TIAA-CREF and Vanguard—to dictate the plans’ investment lineup, to link its recordkeeping services to the placement of investment products in the plans, and to collect unlimited asset-based compensation from their own proprietary products.

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The new complaint says Cammack LaRhette Advisors—now known as Cammack Retirement Group—has served as investment adviser to the plans since 2009. The plaintiffs contend Cammack is a fiduciary to the plan because it rendered investment advice for a fee.

In a statement, Cammack said, “We believe the claims have no merit and will be vigorously defending them.”

The complaint alleges Cammack gave plan fiduciaries “flawed advice.” It says the use of Morningstar weighted averages is an inappropriate benchmark for evaluating fees charged by the investment options offered in the plans because these averages include mostly retail share classes of funds that carry far higher fees than those appropriate for inclusion in massive jumbo plans, like the NYU Plans. “To use the Morningstar blended average to evaluate the appropriateness of the fees in the Plans would produce distorted results that give the incorrect appearance that high-fee funds in the Plans had reasonable fees compared to industry averages that fail to account for the massive size and bargaining power of the Plans,” the complaint says.

Plantiffs contend that Cammack’s vice president, Jan Rezler, has admitted that the use of Morningstar averages as a fee benchmark is inappropriate for large plans such as NYU’s. Yet, they allege, when Cammack actually became the plans’ investment consultant, Rezler has conceded under oath that Cammack used those Morningstar fee averages to evaluate each of the plans’ funds. “This use of an improper benchmark masked the excessive fees in the Plans’ funds and reveals a flawed benchmarking process,” the complaint says.

In addition, plaintiffs allege that despite their long histories of dramatic underperformance and exorbitant fees, Cammack never recommended removing the CREF Stock or TIAA Real Estate Accounts. They say the Retirement Plan Committee’s co-chair, Margaret Meagher, admitted that the committee never considered removing the CREF Stock Account and never asked Cammack whether they considered the prudence of the CREF Stock Account since TIAA required its inclusion in the plans.

According to the allegations, had Cammack conducted a comprehensive analysis of the TIAA Real Estate Account when Cammack was first engaged as the plans’ adviser, the fund’s exorbitant fees and decade’s worth of substantial underperformance for the period leading up to December 31, 2009 (and continuing thereafter), would have provided Cammack with all the necessary information to recommend the fund’s removal.

“As a result of Cammack’s imprudent investment advice failing to recommend the removal of the imprudent TIAA Real Estate and CREF Stock Accounts despite their high fees and histories of abysmal performance, the Plans suffered tremendous losses,” the complaint says.

In addition, the plaintiffs say Cammack has never discussed with the Retirement Plan Committee terms such as float income and securities lending and Cammack failed to take these forms of compensation into account when evaluating the reasonableness of the plans’ recordkeeping fees. “In failing to take this into account, Cammack provided flawed investment advice which the Retirement Plan Committee accepted without question,” the complaint says.
Data and Research January 22, 2018

Many DC Plan Sponsors Reduced Fees in 2017

A survey finds a drop in revenue sharing used to pay plan fees, and that half of DC plan sponsors plan to renegotiate fees with providers in 2018.

Reported by

Following their most recent fee review about four in ten defined contribution plan sponsors (40.5%) reduced fees, according to the 2018 Callan Defined Contribution Trends Survey. Callan says this is a notable increase from prior years (31.6% did so in the prior year’s survey).

The number of plan sponsors that calculated their DC plan fees within the past 12 months rose to 83.1% in 2017 from 78.8% in 2016. Only 5% have not calculated plan fees within the past three years (or are unsure).

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More than three-quarters of plan sponsors (77.2%) benchmarked the level of plan fees as part of their fee calculation process, down slightly from last year (79.2%). The percentage of plan sponsors that do not know whether plan fee levels are benchmarked (9.6%) is up from 7.5% in 2016.

In the majority of cases, the plan’s consultant/adviser conducts the benchmarking (82.8%). This is higher than in prior years. Conversely, fewer plan sponsors are benchmarking their own plan fees than in prior years. Plan sponsors tend to use multiple data sources in benchmarking, though consultant databases (49.4%) and general benchmarking data (46.0%) are the most frequently cited. Placing the plan out to bid more than doubled from last year (7.1% in 2016 vs. 18.4% in 2017).

Fewer than half of plan sponsors kept fees the same following their most recent fee review (45%), down from 49% in 2016.

After reducing fees, the next most common activity resulting from a fee assessment in 2017 was changing the way fees were paid. However, that proportion is down significantly from 2016—potentially reflecting the fact that many plan sponsors have already changed their fee payment model.

“Other” increased from last year and included responses such as changing manager practices, eliminating a vendor, and plan structure changes. A few respondents also indicated that the fee review was still in progress; however, fee reductions were expected once complete. One plan sponsor noted: “We have reduced fees repeatedly since 2011.”

Investment management fees are most often entirely paid by participants (85.6%), and almost always at least partially paid by participants (97.5%). In contrast, fewer than two-thirds (62.7%) of plan sponsors indicate all administrative fees are paid by participants—although that is up notably from 50.9% in 2016. Most plan sponsors (82.2%) note that at least some administrative fees are participant-paid. Of those solely paying through an explicit fee, using a per-participant fee continues to be more popular than an asset-based fee, and by a wider margin in 2017.

Revenue Sharing

Representing a noticeable drop from last year, 27.4% of survey respondents pay administrative fees either solely through revenue sharing or through a combination of revenue sharing and some type of out-of-pocket fees. Further, only 14.7% pay solely through revenue sharing (vs. 29.2% in 2016).

Only 8% of plans with revenue sharing report that all of the funds in the plan provide revenue sharing, a small increase from 2016. The most common is to have between 10% and 25% of funds paying revenue sharing, a change from 2016 when the most common was 26% to 50%. One in six (16%) plan sponsors say they are not sure what percentage of the funds in the plan offer revenue sharing.

Over half of plans with revenue sharing have an Employee Retirement Income Security Account (ERISA) account. This is up significantly from 2011, when just over one-third reported having one. The percentage of plan sponsors that do not know if they have an ERISA account increased to 12.5% in 2017.

In most cases (71.4%), reimbursed administrative fees are held as a plan asset. This is down from 80.0% in 2016. Conversely, holding ERISA assets outside the plan increased from 5% in 2016 to 21.4% in 2017.

Communications are the most commonly paid expense through the ERISA account (64.3%), taking over the number one spot from consulting and rebating excess revenue sharing, both of which tied again—but in second place.

Future fee initiatives

Six in ten plan sponsors are either somewhat or very likely to conduct a fee study in 2018. Other somewhat or very likely actions include switching to lower-fee share classes (51.7%) and renegotiating recordkeeper fees (50.5%).

Renegotiating investment manager fees jumped to being in the top five somewhat or very likely activities (39.4%) versus being in the bottom five last year.

More findings from Callan’s survey may be found here.

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