On August 11, 2022, a class action suit was filed against the Dover Corporation to include the Dover Company Benefits Committee for breaching their fiduciary duty of prudence owed to the Dover Corporation Retirement Savings Plan. This is an excess fee case to its recordkeeper, Wells Fargo, from 2009 through September 2020, and to the in-Plan managed account option, Financial Engines (from 2017 to 2020).
We will only focus on the portion of the Complaint regarding Managed Account Services. The lawsuit alleges:
- QUESTIONING PRUDENT SELECTION OF INVESTMENT OPTION – The assets of a participant signing up for a managed account service are managed based upon a program designed by the managed account provider that purportedly customizes the participant’s portfolio based upon factors such as their risk tolerance and the number of years before they retire. In practice,
- There is often little to no material customization provided to the vast majority of plan participants which results in no material value to most, if not all, participants, relative to the fees paid.
- Many managed account services merely mimic the asset allocations available through a target date fund while charging additional unnecessary fees for their services.
- Managed account services are often offered by covered service providers to increase their revenue through their relationship with a retirement plan.
- Managed account services have historically been expensive compared to other alternatives, such as target date funds that provide the materially same service (e.g., an automated time-based dynamic asset allocation creation and rebalancing solution).
- FAILURE TO CONTROL PLAN EXPENSE – The costs of providing managed account services have declined and competition has increased. As a result, the fees providers are willing to accept for managed account services have been declining for many years. The Plan Sponsor caused Plan participants to pay excessive fees for the managed account services through Financial Engines it made available to Plan participants by not periodically soliciting bids from other managed account service providers and/or not staying abreast of the market rates for managed account solutions to negotiate market rates.
- FAILURE TO MONITOR – Benefits Committee had a continuing duty to regularly monitor and evaluate the Plan’s managed account provider to make sure it was providing the contracted services at reasonable costs, given the highly competitive market surrounding managed account services and the significant bargaining power the Plan had to negotiate the best fees.
The Complaint concludes:
- Financial Engines managed account services added no material value to Plaintiff or to other Plan participants to warrant any additional fees. The asset allocations created by the managed account services were not materially different than the asset allocations provided by the age-appropriate target date options ubiquitously available in the market.
- Wells Fargo promoted the Financial Engines managed account service over other potential managed account solutions because Wells Fargo earned more revenue when Plan participants used the Financial Engine services.
- The Benefits Committee had a fiduciary duty to do all of the following: ensure that the Plan’s managed account service fees were reasonable; manage the assets of the Plan prudently; defray reasonable expenses of administering the Plan; and act with the care, skill, diligence, and prudence required by ERISA.
This latest case again highlights the lack of uptake by DC plans for managed account services. Cost is one of the biggest obstacles for adopting managed account services, especially as a Qualified Default Investment Solution (QDIA) option. It should not be surprising that not all managed account services are the same. A robust managed account engine allows multiple inputs to personalize a participant’s retirement portfolio and would be responsive to new data and information received over time from the participant to reflect changes in real time. A robust managed account service is superior to a single factor, one-size fits all target date fund solution (TDF) where participants within a 5-year cohort would be lumped into the same portfolio. Moreover, an off-the-shelf TDF uses average U.S. worker data that is broad and may have little resemblance to any one participant in the Plan within that vintage. A fiduciary should first be informed of what a managed account service can offer and what the differences among managed account providers are in terms of assumptions, factors/inputs and reaction functions to each. Moreover, a fiduciary should understand what the managed account is solving for.
In the IT and AI infused world we live in today, personalization is what consumers have come to expect. We should expect the same type of participant centricity in retirement investing. This is even more true when it is the QDIA where personalization can really help the less informed or engaged workers.
INDIVIDUALIZED GLIDE PATH SOLUTION (iGPS©)
Nexus338 has created a low-cost middle step between the popular single factor TDF and the robust managed account service specifically to satisfy the QDIA space. iGPS© is one of the first personalized target date solutions designed specifically as a QDIA and is available at recordkeeper platforms connected with iJoin©. Each participant’s personal factors (age, salary, account balance, employer contribution and employee voluntary contributions), readily available on the plan’s recordkeeping platform, are taken as inputs into designing participant-specific portfolios for each participant. On an ongoing basis, as the inputs are updated, the personalized portfolio would correspondingly adjust to reflect the new information. This approach:
- focuses each participant portfolio on a one-on-one rather than using average U.S. worker average to construct portfolios;
- includes an ERISA 3(38) fiduciary manager to be responsible for participant-level allocation and ongoing monitoring as well as benchmarking the performance of the underlying investment options; and
- uses a mix of active and passive managers to keep the investment costs in check.