11/28/2016 – Take-Away: On November 9, 2016, participants in Ford Motor Company DC plans filed a lawsuit against the plans' recordkeeper, Xerox HR Solutions, LLC (“Xerox HR”), alleging Xerox HR improperly received “kickbacks” from Financial Engines Inc. (“FE”), the participants' professional investment advisor, in violation of the fiduciary responsibility and prohibited transaction rules of ERISA.
Background: The lawsuit alleges that FE breached its fiduciary duty by paying Xerox HR nearly a third of the fees that FE assessed for participants in FE's managed account service. The lawsuit characterizes such payments as a “pay-to-play” arrangement for which Xerox HR offered no substantial services to participants other than providing electronic access to FE. In turn, as the plan's fiduciary, Xerox HR should have advised the plan and its participants of the breaches of fiduciary duty by its co-fiduciary, and should never have hired a fiduciary that would engage in kickbacks.
The lawsuit suit also alleges that Xerox HR breached its fiduciary duties by entering into a scheme to inflate fees and improperly share revenue; failing to monitor and control its expenses; and causing itself to be paid excessive fees in breach of its fiduciary duties, among other things.
Specifically, the lawsuit alleges that “. . . the amount of compensation Xerox HR received was plainly unreasonable in relation to the services being provided.” In particular, it alleges, there is no rational justification for Xerox HR to receive such an asset-based fee because:
As such, the lawsuit contends, “An asset-based fee to Xerox HR for a fixed level of service is unreasonable.”
According to the lawsuit, Xerox HR can be sued as a plan fiduciary by virtue of the fact that it hired FE, as hiring a service provider is itself a fiduciary function.
Although FE was not a named defendant in the lawsuit, FE is described in the lawsuit as being “in clear violation” of its duty of undivided loyalty to Ford plan participants because of its quid pro quo arrangement with Xerox HR in which FE charged excessive fees for investment advice in order to become the exclusive investment advice provider to Xerox HR's platform.
Bottom Line: A similar lawsuit was filed against Voya in September. These lawsuits are likely to be closely followed. According to Callan's 2016 DC Trends Survey, 88% of DC plans offer investment guidance/advisory services. It is not uncommon for recordkeepers to charge asset-based fees for access to advisory services.
— Lori Lucas