Conflicted 401(k) Consultants-Should Plan Sponsors Fire Them, Sue Them…Or Both?

Many if not most 401(k) consultants for 401(k) plans under $1 billion have serious conflicts of interests which in itself can be a fiduciary breach and contribute to excessive fees.  While the number of conflicted consultants and level of conflicts in mega plans is still significant it is less prevalent.   A Plan Fiduciary with a conflicted consultant takes on much greater fiduciary risk of getting sued. 

Ignorance of conflicts is no excuse.  Even comedians like John Oliver have done videos on 401(k) advisor conflicts and if you have not seen it please watch at  https://www.youtube.com/watch?v=gvZSpET11ZY  

As the number of plans being litigated under $1billion grows, this issue will come out front.  Already in the Norton Hospital Case the conflicted consultant Lockton ended up pay half of the $5.75mm settlement. 
https://www.planadviser.com/lockton-norton-healthcare-agree-pay-5-75m-erisa-settlement/

Attorney James Watkins states that Consultants/Advisors recommending cost-inefficient/imprudent investment options to a plan sponsor, knowing that the plan is held to a fiduciary standard, violates duty of fair dealing, which is actionable as a breach of contract per SCOTUS (Shaw v. Delta Air Lines).

Jennifer Cooper published a report on the US consultant industry in 2013 based on the ADV report filed by RIA’s.[i]

They found numerous conflicts.   The most common being dually registered consultant/advisors who are also brokers or have affiliated brokers. [ii] 

Dr. Nicole Boysen of Northeastern University in Boston has written a paper that shows consultant/advisors (RIAs) that both charge fees and commissions (dual registration) use higher fee lower performing mutual fund families that kick them back the most in “revenue sharing” Boysen created a list of high fees underperforming mutual funds preferred by dual registered RIAs, which include the American Funds, JP Morgan, MFS Fidelity, PIMCO.[iii]   Conflicted consultants are also known to manipulate statistics using cherry-picked benchmarks to make higher fee funds look better.

From a Forbes story by former SEC attorney Edward Siedle:

In recent years the U.S. Department of Labor, the Securities and Exchange Commission, and the General Accountability Office have all advised companies sponsoring retirement plans that conflicts of interest related to investment consultants to plans are widespread and that these conflicts have resulted in reduced returns, as well as higher fees for retirement investors. [iv]……..

While every investment consultant I’ve ever met claims to provide objective, independent advice, the industry is rife with conflicts. If the gatekeepers vetting and recommending money managers to plans are corrupt, then the plan’s entire investment program may be tainted. [v]…………

In fact, consultant conflicts are more pervasive than ever today and, with the growth of alternative investments, consultant secret profits, as well as damages, related to these conflicts have skyrocketed. Most plan sponsors, even  the largest, haven’t a clue about the abuses and, unfortunately, aren’t looking for answers. [vi]

The SEC and FINRA from 2018-20 fined dozens of Dual Registered RIA firms for excessive mutual fund fees around Share Class violations and Revenue Sharing in 401(k) and retail accounts. [vii]

·       SEC – Merrill Lynch (Bank of America) –  Share Class Violation April 17, 2020

·       SEC- Wells Fargo  (Bridgehaven) Share Class March 11, 2018

·       SEC JP Morgan Share Class January 9, 2020

·       SEC  Morgan  Stanley (Greystone) Share Class  November 7, 2019

·       SEC LPL  3/11/19  (Fiduciary First)

·       FINRA AxaEquitable 19

·       SEC MML   Mass Mutual   Sept 21  Rev Sharing Share class violations  

·       SEC VALIC Financial Advisors Inc.  AIG-VALIC   July 28, 2020 Rev Sharing Share class violations

·       SEC VOYA Financial Advisors Inc ING-VOYA    Dec. 21, 2020 Share class   Rev Sharing Share class violations

·       SEC PRUCO Securities, LLC   Dec 23, 2020   Rev Sharing Share class violations

·       FINRA PIMS  (Prudential) June 2020

·       SEC PRINCIPAL Securities, Inc.  March 11, 2019 SEC  Rev Sharing Share class violations

·       SEC TRANSAMERICA  Sept 30, 2020 fee gauging    TA FINRA Share Class Variable 2020 annuities   2014 Fee Gauging    

Any fiduciary who used these so-called consultants in the last 6 years has some serious fiduciary liability in a court case.

Any fiduciary who did not fire these so-called consultants after these SEC fines could have additional liability.

The following consultants have the ability to participate in conflicted activities like revenue sharing.  Not every plan especially some of the largest ones, may have direct conflicts at a given point in time.  This is especially true of Strategic Advisors a Fidelity affiliate as Fidelity has thousands of conflicted and non-conflicted plans.  

LARGE CONFLICTED CONSULTANTS ie DUALlY REGISTERED

  • CAPTRUST Cammock
  • Lockton
  • Sageview
  • Newport Capital
  • CBIZ
  • ADVISED ASSET GROUP LLC owned by Empower (formerly known as Great Western    Strategic Advisors owned by Fidelity).

Plan Sponsors should look at the independence of their advisor/consultants and their regulatory record.  Do they take ERISA fiduciary liability in their contracts? 

If the consultant is lacking in fiduciary responsibility they should be fired.   If these conflicts caused damage you should  consider legal action.  


[i] US Pension Investment Consultants A Report for Fiduciaries, Internal Audit and Risk Management Professionals in 2013[i] Diligence Review Corporation led by Jennifer Cooper, CF

[iii] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3360537

[iv] Forbes, Edward Siedle 6/1/2013 https://www.forbes.com/sites/edwardsiedle/2013/06/18/conflict-free-retirement-plan-advisers-remain-hard-to-find/?sh=4c46e9ee1f24

[v] Forbes, Edward Siedle 6/1/2013 https://www.forbes.com/sites/edwardsiedle/2013/06/18/conflict-free-retirement-plan-advisers-remain-hard-to-find/?sh=4c46e9ee1f24

[vi] Forbes, Edward Siedle 6/1/2013 https://www.forbes.com/sites/edwardsiedle/2013/06/18/conflict-free-retirement-plan-advisers-remain-hard-to-find/?sh=4c46e9ee1f24

[vii] Quote on SEC action in Voya, Valic, Prudential,Principal etc.

https://www.financial-planning.com/news/ameritas-ria-settles-sec-disclosure-case-for-4-6m

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