By Chris Tobe, CFA, CAIA
I have looked at dozens of retirement committee meeting minutes working with both public and ERISA retirement plans and I have seen little or no discussion of vendor due diligence around lawsuits and regulatory issue.
When firms hire an employee, they usually do a background check. From SHRM”
- A background investigation generally involves determining whether an applicant may be unqualified for a position due to a record of criminal conviction, motor vehicle violations, poor credit history, or misrepresentation regarding education or work history. [i]
Given this exhaustive process for one new hire it makes sense to run the same type of background check on vendors for the employee’s retirement plan and It can be argued is the plans fiduciary duty to run one on each vendor.
In literally seconds you can find a list of violations for each firm at https://www.goodjobsfirst.org/violation-tracker
While a violation may not be an immediate reason to disqualify and terminate a vendor, it would be a good fiduciary process for the plan to ask the vendor to explain the violation and why it does not affect their ability to serve the plan.
A lot of plan fiduciaries would not be surprised by 401(k) litigation if they had followed this easy fiduciary process. Many of the same firms caught by the SEC for share class violations for retail and other institutional funds are doing the same thing in 401(k) and it is showing up in litigation. Many of these firms avoid fiduciary responsibility in their contracts multiplying this risk.
Violation tracker quickly shows: Prudential has 19 investor protection violations with fines totally over $744 million.[ii] Wells Fargo has 223 overall violations 93 investor protection violations. Bank of America 264 overall violations 119 investor protection violations.
.Going to the SEC website under litigation you can easily find the following more detailed violations.
| SEC Merrill Lynch (B of A) – 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 TIAA July 2021 misleading statements failure to disclose conflicts of interest [i] |
| SEC MML Mass Mutual Sept 21 Revenue Sharing Share class violations |
| SEC VALIC Financial Advisors Inc. AIG-VALIC July 28, 2020 Revenue Sharing Share class violations |
| SEC VOYA Financial Advisors Inc ING-VOYA Dec. 21, 2020 Share class Revenue Sharing Share class violations |
| SEC PRUCO Securities, LLC (Prudential) Dec 23, 2020 Rev Sharing Share class violations FINRA PIMS June 2020 |
| SEC PRINCIPAL Securities, Inc. March 11, 2019 Revenue Sharing Share class violations |
| SEC TRANSAMERICA Sept 30, 2020 fee gauging TA FINRA Share Class Variable 2020 annuities 2014 Fee Gauging |
A prudent ERISA fiduciary should be aware of these violations, and/or their consultants/attorneys should have brought this to their attention. They should also be aware of any 401(k) litigation each vendor is involved in both directly and indirectly.
Each vendor’s contracts should state they take fiduciary duty as to not shift it back to the plan.
A background check for every vendor is essential for fiduciaries.
The CommonSense 401k Project 
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