3Q 2022 AMVR “Cheat Sheets”

At the end of each quarterly, I update the five and ten-year Active Management Value Ratio analyses for the non-index based mutual funds in the top ten funds in “Pensions & Investments” list of most commonly used mutual funds in U.S. defined contribution.

Given the recent performance of the markets, it should come as no surprise that the 5 and 10-Year AMVR analyses of the six most popular non-index mutual funds in U.S. defined contribution plans remain relatively unchanged.

Interesting to note that for both the 5 and 10-year period, only Vanguard PRIMECAP Admiral shares managed to qualify for an AMVR ranking.

Also interesting to note the importance of factoring in a fund’s risk-adjusted returns. On the 5-year AMVR analyses, factoring in risk-adjusted returns turned AF’s Washington Mutual Fund’s incremental return from (0.90) on nominal returns, to a positive 0.13. Admittedly, a small positive number, but still a significant change.

On the 10-year AMVR analyses slide, factoring in the fund’s risk-adjusted returns turned their incremental return from (0.57) (nominal) to 0.57 (risk-adjusted.) Likewise for Fidelity Contafund, where an incremental return of (0.79) (nominal) turned into a small, yet positive, 0.09.

Overall, the song remains the same, with the majority of actively managed funds being unable to overcome the combination of the weight of higher fees and cost and high r-squared/correlation of returns number to beat the index of comparable index funds

And so, we continue to see 401(k) actions alleging a breach of fiduciary duties by plan sponsors. Of note, we are seeing an increasing number of cases focusing on target date funds (TDFs). I expect to see more actions involving TDFs, as the AMVR provides compelling evidence of the imprudence of the active versions of such funds. I will post an updated analysis of the active and index versions of both the Fidelity Freedom and TIAA-CREF Lifestyle TDFs next week


Record Keeping Costs and the War Against Transparency

Chris Tobe, CFA, CAIA

Somehow some judges are buying this fallacy that participants get better recordkeeping by paying substantially more for it.  They are accepting this myth without proof and are actually blocking the transparency which would expose this truth by denying discovery. 

Low-Cost recordkeeper Employee Fiduciary says “There are few industries where the phrase “you get what you pay for” is less applicable than the 401(k) industry. That’s because equally competent 401(k) providers can charge dramatically different fees for comparable administration services and investments.[i]   Employee Fiduciary comes out with an example weekly on huge savings in recordkeeping. [ii]

There are no material differences in quality of recordkeeping services    Fidelity at $30 a head is same service as Fidelity at $90 a head.  There are really no material differences that a participant can tell between any recordkeepers, they get statements and have access to a web site.    –

Smug articles gloat on how courts have blocked transparency of discovery for so called differences in record keeping quality that no participants or anyone in the industry can even measure. [iii]  As attorney James Watkins says “Requiring a plaintiff to plead specific information known only to the defendant, without an opportunity to discover such specifics, is obviously just an attempt to protect plans.”

In this absurd insult to justice and transparency, some judges are putting the initial burden of proof on participants where the plan is deliberately hiding the critical information needed to fulfill that burden.

In addition, revenue sharing is an another way to help hide excessive recordkeeping fees, as some judges ignore these obvious issues. A 2021 study by experts from the Federal Reserve and leading universities says higher fees are not associated with better performance; to the contrary, “The future performance of revenue-sharing funds is weaker than that of non-sharing funds.  The bulk of the under-performance is driven by higher fees, though revenue sharing funds display lower performance even after accounting for fees.”[iv]

Revenue sharing does not hold up during discovery and this has been confirmed by the fiduciary liability insurance industry, which put much higher litigation risk on plans with revenue sharing and either denying coverage or raising rates significantly. [v]

There are some instances of additional administrative services couched as education that can, in fact, be harmful to participants.   Especially insurance providers, and especially in hospitals which are known to provide commissioned salespeople who actually try to push participants into higher fee funds and cross-sell them on imprudent outside investments as well.

Competitive recordkeeping costs have been established at $30 to $50 per heard for plans over $200 million in assets.   There are no material differences in the quality of recordkeeping.  Judges are dismissing fees double to such fees for identical services. The fact that such fees are largely ignored because they are non-transparent in no way reduces the  significant harm they cause to participants.

[i] https://www.employeefiduciary.com/knowledge-center/dont-let-your-401k-provider-hide-the-cost-of-your-plan

[ii] https://www.employeefiduciary.com/sample-fee-comparisons/

[iii] https://www.natlawreview.com/article/light-dark-seventh-circuit-helps-clarify-new-pleading-standards-401k-fee-cases

[iv] Pool, Sialm, and Stefanescu, Mutual Fund Revenue Sharing in 401(k) Plans, May 14, 2021,  available at: https://ssrn.com/abstract=3752296

[v] https://www.plansponsor.com/factors-can-cut-cost-fiduciary-liability-insurance/

Predicting Future 401(k) Litigation Risk by Size of Plans

by Chris Tobe, CFA CAIA

The 401(k) market differs greatly by size.  85 percent of 401k plans (534 out of 631 thousand defined contribution plans) (DC Plans) are under $5 million in size.  The DOL is overwhelmed with the 534 thousand plans under $5 million, of which there are enough bad actors doing engaged in highly questionable activities, such as taking participants’ money for personal use, that they have not touched the excessive fees issue, leaving it to the legal community to address such concerns.  Less than 1 percent of DC Plans are over $200 million in assets and are generally cost effective to litigate.

However, less than 1 percent is still nearly 4000 plans with over $200 million each in assets.   However, within this 4000, differences vary greatly by size as well.   My best guess is that less than 500 actions have been filed according to what I have found.   I still believe there is room for around 2500 more actions to be filed over the next decade.      

An August 2022 Bloomberg article cites $150 million in settlements over the last 3 years. Bloomberg puts the number filed at around 200 since 2019 so my estimates may be conservative.[i]  Bloomberg notes that decisions issued in the seven months since the US Supreme Court Hughes decision have tended to favor plaintiffs over defendants. Bloomberg predicts that “employers negotiating future settlements may be facing higher price tags than the $1 million to $5 million range seen over the past few years.” This Bloomberg article shows a growing pace of ERISA litigation.

An August 2022 article by Fred Barstein of 401kTV also predicts the rapid growth of litigation in smaller 401(k) plans. [ii]

401(k) plans of $3 billion and more assets
According to my data base there are 334 plans over $3 billion in assets.  This has been the most litigated group, with well over 100 actions filed. There is still a high probability of 100 or more cases coming from this group, perhaps even more if there is double dipping, as many earlier litigating plans have gone halfway at best in lowering fees.

For larger plan administrative costs, fees above $50 a head, or even one high fee option, may be enough to trigger a suit. This could apply to plans that have already been litigated once and did not adequately cut costs the first time. Does every plan option have to been prudent even those who go through to the brokerage window?  If so, this could this be litigated as high fee funds and even Crypto Currency are in widely held brokerage windows.

Many of the largest plans unitize investments with defined benefit plans. Will the new level of transparency go through to target date funds with underlying alternatives like Private Equity?  Alternative contracts typically contain multiple fiduciary breaches, excessive fees along with liquidity and other breaches. 

401(k) plans of $1b – $3 billion

There are an estimated 717 plans between $1-$3 billion, with probably 200 that have been litigated, leaving room for maybe 300 more. 

There are lots of plans with administrative costs above $50 a head, or even more with at least one high fee option, along with all the other attributes like brokerage windows like the largest plans.

401(k) plans of $500m – $1 billion
There are 961 plans between $500m $1 billion, with probably only 50 or less cases litigated.  This area will probably have the most explosive growth, with well over 600 plans with high fee providers. There are many higher fee insurance recordkeepers in this group and conflicted consultants, along with share class violations in many funds.

401(k) plans of $200m – $500m
There are 2259 plans between $200-$500 million. 2022 will start to see a great growth in litigation in this area.      Plans in this group who start fixing their plans could greatly minimize their chances of litigation. I still guess that over 1500 plans could be subject to litigation. There are even more higher fee insurance recordkeepers in this group and conflicted consultants, along with share class violations in many funds.

403(b) plans
ERISA 403(b) plans include: not-for-profit hospitals, and not-for-profit universities, private not-for-profit K-12 schools. Non-ERISA 403(b) plans include public K-12 schools, public universities and some university related hospitals.

The largest 30 or so private universities 403(b)s have already been hit with litigation.  Northwestern is typical with 3 different recordkeepers Fidelity, Vanguard, & TIAA.  This portion of the 403(b) market with multiple recordkeepers is unique as almost all 401(k), which is more oriented toward single record keeper, so all could be litigated around administrative costs.   Fidelity and TIAA also have high-cost options and TIAA has high-cost higher risk annuity options as well.  The next 100 or so private universities will be at great risk of litigation.

The big wave of 403(b) litigation will probably be hospitals.   While they typically only have one recordkeeper, they are much more likely than 401(k) plans of the same size to use higher fee (especially insurance company) based platforms.

401(k) plans of $50m – $200m
There are an estimated 8646 plans between $50-$200 million. I predict litigation will be low in 2022 as there are so many larger targets.  However, over the next decade it could pick up.   This gives plans in this size range time to clean up their plans, giving maximum value to participants while minimizing litigation risk in the future.

Higher fee insurance recordkeepers, conflicted consultants along with multiple share class violations, are rampant in this group with much higher percentage.

401(k) plans of $20-$50m and $5-20m
There are an estimated 14915 plans between $20-$50 million and an estimated 69343 plans between $5-$20 million. I predict that litigation involving these plans will be rare during the next 5 years, as there are so many larger targets, but over the next decade it could pick up.   This gives plans in this size range time to clean up their plans, giving maximum value to participants while minimizing litigation risk in the future.

Parting Thoughts
401(k) litigation is only in its infancy, with only 15-20 percent of the 3000 potential largest complaints filed. This number could triple if the litigation goes down to plans from $50-$200 million.   All of the controversy now is mostly in the largest cases being litigated.   Most of these smaller cases are much more clear-cut regarding potential fiduciary violations.

Plans can fix themselves or wait to be sued. Unfortunately, many are close-minded, relying solely on conflicted advice from brokers and insurance agents that tell plans that they are OK when they actually are not. Many plans will be in for a rude awakening. 

[i] https://news.bloomberglaw.com/litigation/suits-over-401k-fees-nab-150-million-in-accords-big-and-small?context=search&index=0  
[ii] https://www.wealthmanagement.com/rpa-edge/why-lawsuits-against-rpas-smaller-dc-plans-are-inevitable

Contact Info: 542-648-1303, tobech348@gmail.com, christobe.com

The Conversation Every 401(k) and 403(b) Plan Needs to Have: The Plan Sponsor Liability Circle™

James W. Watkins, III, J.D., CFP®, AWMA®

Whenever plan sponsors and plan advisers talk about 401(k) litigation, they always point the finger at those bad ‘ol ERISA plaintiff attorneys. Since I am one of those bad folks, I respectfully disagree with such sentiments. I respectfully suggest that plan sponsors should look in the mirror to see the real party for such litigation. As the famous comic strip, “Pogo,” once said, “we have met the enemy and he is us.”

Whenever I talk with a CEO and or a 401(k) investment committee, this is the first graphic I show them. Most plan advisers insist on plan sponsors agree to an advisory contract that contains a fiduciary disclaimer clause. Many plan sponsors are not aware that they have agreed to such a provision since they are usually set out in legalese. But they are usually there.

When a plan sponsor agrees to such a clause, it waives important protections for both itself and the plan participants. With a fiduciary disclaimer clause, securities licensed advisers can claim to be subject to Regulation “Best Interest” (Reg BI) rather than the more demanding duties of loyalty and prudence required under a true fiduciary standard.

Reg BI claims that it requires brokers to always put a customer’s best interests first, including considering the costs associated with any and all recommendations. The Reg BI turns around and allows brokers to only consider “readily available alternatives,” which the SEC considers to be the cost-inefficient and consistently underperforming actively managed mutual funds and various annuity products. In whose best interests?

Unless a plan sponsor properly performs the investigation and evaluation required under ERISA, this usually results in 401(k) litigation and the plan sponsor settling for a significant amount. As we discussed in a previous post, when you consider that all of this can be easily avoided by a plan sponsor by performing a cost-efficiency analysis using our free Active Management Value Ratio, you have to wonder why plan sponsors do not better protect themselves by simplifying their plans and ensuring that they are ERISA-compliant.

My experience has been that most plan sponsors create unnecessary liability exposure for themselves due to a mistaken understanding of their true fiduciary duties. “The CommonSense 401(k) Plan”™ provides a simple solution that reduces both administration costs and potential liability exposure, resulting in a win-win situation for both plan participants and plan sponsors.

So, for plan sponsors and plan advisers, the next time you point a finger at ERISA plaintiff’s attorney and blame us for the number of 401(k) litigation cases, remember the words of my good friend, Charles Nichols, when you point at us, three of your remaining fingers point back at you. Then contact InvestSense for a free “The CommonSense 401(k) Plan” consultation at “CommonSense InvestSense.” (investsense.com)

Copyright InvestSense, LLC 2022. All rights reserved.

This article is for informational purposes only, and is neither designed nor intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances.  If legal, investment, or other professional assistance is needed, the services of an attorney or other professional advisor should be sought.

401(k) Background Checks

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.

[i] https://www.shrm.org/resourcesandtools/tools-and-samples/toolkits/pages/conductingbackgroundinvestigations.aspx

[ii] https://www.goodjobsfirst.org/violation-tracker

[iii] http://www.sec.gov/litigation/admin/2021/33-10954.pdf

Problems With Target Date Funds

by Chris Tobe, CFA, CAIA

Target Date Funds now are above 50% of all 401(k) assets.[i]   They are the most non-transparent plan investment option and the easiest to hide fees and play performance games.   They are also the dominant default option or QDIA (Qualified Default Investment Alternatives) resulting in the highest level of fiduciary responsibility.    Despite the high level of fiduciary risk, they are specifically designed to avoid accountability and thus need the most scrutiny. 

A 2021 study shows that in general Target Date funds cause participants to “lose 21%” over career to primarily excessive fees from proprietary funds.[ii]  A 2020 study finds that asset managers exploit reduced investor attention (i.e. lack of transparency) to deliver lower performance.[iii]

The history of the Target Date Fund, I believe, is mainly a story about Fidelity.   I think around 2002 they saw Vanguard and indexing as their biggest threat.  Fidelity needed a new vehicle to hide the fees for active mutual funds and created the Target Date Fund. 

With heavy lobbying by Fidelity, in 2006 the Pension Protection Act was passed. This act allowed for auto-enrollment of target-date funds into defined contribution plans and set the stage for QDIAs (Qualified Default Investment Alternatives), which strongly supported the growth of these funds.[iv] 

Fidelity had Target Date Funds ready to go before the legislation was passed and dominated in market share immediately, and still keep the highest levels today.  This gave them basically a 10-year ride from 2006-16 in which they could load-up their higher fee active funds in target date funds with little or no pushback.   Starting around 6 years ago there has been a shifting inside Fidelity’s target date funds toward greater indexing. 

After choosing a record keeper or administrator, most plans automatically default to the Target Date Funds of that company.   A prudent process would be to have a competitive bid, but most 401(k) committees make selections based on informal processes and relationships. 

Many times, the target date and administrative fees are commingled in the Target Date funds using revenue sharing to create a total lack of transparency.[v]

This record keeping default fuels the 2021 study showing that Target Date funds cause participants to “lose 21%” of their end-returns over their career due primarily to excessive fees from proprietary funds [vi]

A 2020 study found that the average higher-cost actively managed target date funds failed to perform as well as the cheaper indexed competition in the 2015-2019 period.[vii] Some of the actively managed funds did very well in relative terms, but most did not. We found that past performance is only weakly predictive of future performance. The implication is that even an active fund with a superior record has an expected future return below the passive alternative TDFs.

However, even within a record keeper’s Target Date Fund selections, there can be a wide variety of fee levels (especially with market leader Fidelity) in which 401(k) committees can make better fiduciary decisions. The burden is on the plan fiduciary to show why they are not selecting an index fund for the Target Date Fund the QDIA. 

The least transparent Target Date Funds are those that are not SEC registered mutual funds.  Many are in poorly state regulated annuities either in whole or in part.   Many are in poorly state regulated Collective Investment Trusts (CIT)s. [viii]  There are a few good CITs like the Fidelity, Vanguard, T. Rowe Price that are clones of their SEC mutual funds at a lower cost.   Many CIT’s can hide private equity or annuities and their many hidden fees and risks. [ix]

Many, if not most, CIT based Target Date Funds and all the annuity TDF’s are a fiduciary breach based on the higher risks alone, not to mention the excessive fees.

Many plans rely on consultants to guide them in the selection of Target Date Funds.  However, some consultants have conflicts in which they are compensated more for high fee non-index funds in backdoor payments.  Plans blaming consultants on poor Target Date Fund choices does not absolve them from fiduciary liability, but in some cases they have been able to get conflicted consultants to pay a portion of the settlement. [x]

High fee Target Date Funds typically justify their existence by some manipulation of a benchmarks.   They may hold investments which are not in the benchmark, which create different performance and risk characteristics.   They may use different allocations, mostly to higher equity positions, to create the appearance of higher returns. 

A 2020 study shows Target Date Funds ‘Create a Lack of Accountability”[xi] For example a 2040 T. Rowe or American Fund can appear to outperform a 2040 Vanguard fund because it has a 90/10 equity allocation compared to 80/20 with Vanguard.   “Target Date Fund managers engage in fee-skimming by charging higher fees on the less observable, more opaque underlying funds” [xii]  Opaque funds can be illiquid high-risk alternatives like private equity and hedge funds & annuities.

In some cases, the courts have given active managers the benefit of the doubt on their claim that it is conceivable they could outperform index plans, especially in down markets. The validity of this market-based argument has become harder. The recent Supreme Court decision letting the appeal in Brotherston vs Putnam Investments, LLC stand upholds the use of index funds for benchmarking purposes in calculating damages – regardless of performance.[xiii]

Plans should always document in their 401(k) plan minutes the following regarding Target Date Funds:

  • The plan’s investment policy statement should include provisions on selecting and monitoring Target Date Funds.  Does it address each asset class involved in the plan including inside the Target Date Funds?
  • Each asset class in each Target Date Fund should be fully evaluated in terms of risk, fees, and performance as if they were a standalone option. 
  • Assets that are not SEC registered mutual funds or registered securities such as private equity, annuities need additional scrutiny and documentation.
  • Additional documentation, including a Request For Proposals (RFP), should be required if the plan is using a recordkeeper vendor’s proprietary Target Date Funds.
  • Select an appropriate benchmark to evaluate each asset class in the funds.  Compare and justify the attributes of your fund if it has differences with the benchmark
  • Understand the different fees and compare fund family fees, bearing in mind that Target Date Funds have multiple layers of fees.
  • Do a RFP for Target Date Funds at least every 5 years.
  • Carefully document the reasons that the fund was selected.
  • Regularly monitor the funds.
  • Document any and all reasons for not removing retained funds if performance has lagged peer funds.

Target Date Funds are now above 50% of all 401(k) assets.[xiv] They deserve a 50% level of fiduciary oversight or even more because of their lack of transparency. 

[i]  https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3729750

[ii] https://www.kiplinger.com/investing/mutual-funds/602705/the-disturbing-conflicts-of-interest-in-target-date-funds

[iii] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3729750

[iv] https://mutualfunds.com/retirement-channel/history-target-date-funds/

[v] https://commonsense401kproject.com/2022/04/02/revenue-sharing-in-401k-plans/

[vi] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3729750

[vii] AN ANALYSIS OF THE PERFORMANCE OF TARGET DATE FUNDS John B. Shoven and Daniel B. Walton, https://www.nber.org/system/files/working_papers/w27971/w27971.pdf   Oct.2020

[viii] https://commonsense401kproject.com/2022/02/22/cits-collective-investment-trusts-in-401k-the-good-and-the-bad/

[ix] https://commonsense401kproject.com/2022/02/15/private-equity-in-401k-plans-a-ticking-time-bomb/

[x] https://commonsense401kproject.com/2022/03/09/conflicted-401k-consultants-should-plan-sponsors-fire-them-sue-them-or-both/

[xi] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3729750

[xii] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3729750

[xiii] https://www.plansponsor.com/supreme-court-will-not-weigh-burden-proof-index-fund-comparison/

[xiv] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3729750

Healthcare 401(k)/403(b) Plans: A Growing Target of Litigation

by Chris Tobe, CFA, CAIA

Floodgates are opening after US Supreme Court Northwestern 403(b)Case. [i] Most Hospitals not affiliated with public universities are subject to ERISA laws.  Hospitals tend to have a higher percentage of high fee funds and a much higher risk of litigation.

Why are hospitals at such high risk?  My take is that the 403(b) culture with its mix of ERISA and non-ERISA plans tends to have higher fee providers especially those associated with insurance companies.   My other theory is that Hospitals face so much litigation on health care issues that this litigation is not seen as material by senior management.  GAO recently did a report confirming that 403(b) s are not as sensitive to fees. [ii]

Here is the list of the 21 ERISA class actions I have found against hospital and health care 403(b)s and 401(k)s.  Columbus GA Regional Hospital, Aurora Health WI Iowa Healthcare, Henry Ford 401k , Henry Ford 403b, Spectrum Health, Mercy Hospital Health IL Kalenda NY Barnabas Health. Rush University Medical Center, MedStar Health  MD, Boston Children’s Hospital Corporation, Froedherdt WI,  B.Braun Medical Inc.PA, Allina Health plan, Emory Healthcare, Bon Secours.   Settlements I have found include Norton Ky ($5mm),  Southcoast MA Hospitals Group ($2mm), Bronson Healthcare ($3mm),  Novant Health ($32mm).

Many hospitals do not have independent consultants and one Lockton actually paid $2.5mm of the $5mm Norton Hospital settlement. [iii]  Many hospitals still use revenue sharing which is a magnet for litigation. [iv]  Hospitals are also high users of annuities. [v]

For most hospitals who have not paid attention and lowered fees already substantially it is only a matter of time before they face litigation.  Even larger physician groups will soon be subject to litigation as well.  Plans doing half fixes will not avoid litigation and some who have already settled may be sued a 2nd time.

[i] https://commonsense401kproject.com/2022/03/04/brave-new-world-how-hughes-v-northwestern-the-fiduciary-responsibility-trinity-and-the-active-management-value-ratio-are-changing-the-401k-landscape/

[ii] https://www.financial-planning.com/list/gao-study-examines-403b-plans

[iii] https://commonsense401kproject.com/2022/03/09/conflicted-401k-consultants-should-plan-sponsors-fire-them-sue-them-or-both/

[iv]  https://commonsense401kproject.com/2022/04/02/revenue-sharing-in-401k-plans/

[v] https://commonsense401kproject.com/2022/02/28/stable-value-the-goood-the-bad-and-the-ugly-avoiding-litigation/

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. 

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.  


  • 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.


The “Fiduciary Prudence Trinity”: ERISA Fiduciary Law After the Hughes/Northwestern Decision

SCOTUS recently announced its much anticipated decision in the case of Hughes v. Northwestern University.1The significance of the decision cannot be overstated, as it dramatically changes the “rules of the game” for 401(k) and 403(b) retirement plans,

Hughes was the last piece of what I am referring to as the “Fiduciary Responsibility Trinity.” The trinity is composed of three key ERISA related decisions-Tibble v. Edison International2, Brotherston v. Putnam Investments, LLC3, and Hughes. Given the heavy reliance that the Supreme Court and the First Circuit Court of Appeals, as well as the Solicitor General, placed on the common law of trusts, an argument can be made that the logic set out in the trinity decisions is equally applicable to all investment fiduciaries.

So why are the trinity so important? Here are key quotes from each decision.


We have often noted that an ERISA fiduciary’s duty is ‘derived from the common law of trusts.’ In determining the contours of an ERISA fiduciary’s duty, courts often must look to the law of trusts.4

The Restatement (Third) of Trusts is a restatement of the common law of trusts. So, the Court is recognizing the Restatement as a legitimate resource in addressing fiduciary questions.

Under trust law, a trustee has a continuing duty to monitor trust investments and remove imprudent ones. This continuing duty exists separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset…. Rather, the trustee must ‘systematic[ally] conside[r] all the investments of the trust at regular intervals’ to ensure that they are appropriate….In short, under trust law, a fiduciary normally has a continuing duty of some kind to monitor investments and
remove imprudent ones.5


Congress sought to offer beneficiaries, not fiduciaries, more protection than they had at common law.6

[A]ny fiduciary of a plan such as the Plan in this case can easily insulate itself by selecting well-established, low-fee and diversified market index funds. And any fiduciary that decides it can find funds that beat the market will be immune to liability unless a district court finds it imprudent in its method of selecting such funds, and finds that a loss occurred as a result. In short, these are not matters concerning which ERISA fiduciaries need cry “wolf.”7

[T]he Restatement specifically identifies as an appropriate comparator for loss calculation purposes ‘return rates of one or more. . . suitable index mutual funds or market indexes (with such adjustments as may be appropriate).’8

In Brotherston, the lower court had ruled that the plan participants’ expert could not calculate alleged damages by comparing actively managed funds within the plan with comparable index funds, the copurt ruling that that would constitute comparing “apples to oranges.” The First Circuit’s decision effectively discredits the “apples to oranges” argument.


The Seventh Circuit erred in relying on the participants’ ultimate choice over their investments to excuse allegedly imprudent decisions by respondents. In Tibble, this Court explained that, even in a defined-contribution plan where participants choose their investments, plan fiduciaries are required to conduct their own independent evaluation to determine which investments may be prudently included in the plan’s menu of options…. If the fiduciaries fail to remove an imprudent investment from the plan within a reasonable time, they breach their duty.9

The Seventh Circuit had dismissed the plan participants’ case on the basis of the “menu of options” argument, which said a mixture of both prudent and imprudent investment options within a plans was permissible, as it provided plan participants with more choices. SCOTUS effectively discredited the “menu of options” defens

Going Forward
Bottom line, the combined impact of the trinity decisions is that cases will now be decided based on their merits, not on legal fictions such as the “apples and oranges” and “menu of options” defenses. This should result in more protection for plan participants in the form of fewer dismissals of 401(k)/403(b) …as long as the attorneys for plan participants properly plead such cases to meet SCOTUS’ plausibility standard for pleading.

1. Hughes v. Northwestern University, 19-1401 (2022).
2. Tibble v. Edison International, 135 S. Ct. 1823 (2015).
3. Brotherston v. Putnam Investments, LLC, 907 F.3d 17 (2018).
4. Tibble, 1828.
5. Tibble, 1828-29.
6. Brotherston, 37.
7. Brotherston, 39.
8. Brotherston, 31.
9. Hughes, Ibid.

James W. Watkins, III, is a licensed attorney (41 years), specializing in securities and ERISA law, a Certified Financial Planner™ professional (32 years) and an Accredited Wealth Management Advisor. He has extensive experience in evaluating the legal prudence of various types of investments, including mutual funds, and advising 401(k)/403(b) pension plans on both designing and monitoring plans to ensure legal compliance.