By Carol Buckmann
Are investment advisors now in the crosshairs?
I don’t track every fee lawsuit in these blogs. There are just too many of them. A lot of the filings also seem to be cookie cutter versions in which allegations from one suit are cut and pasted into new complaints. But occasionally, a tactic comes along that stands out as potentially changing the playing field.
NYU Suit Amended to Include Advisor
A 403b lawsuit against New York University has been amended to include Cammack LaRhette, the plan’s investment advisor, as a defendant in addition to the plan committee. Since advisors typically have agreements that make them co-fiduciaries with the plan’s committee, and may be deep pockets, it is puzzling why only a very small number of prior lawsuits included advisors as defendants. However, the Department of Labor’s Fiduciary Rule, which made more people who advise plans fiduciaries, may mean we will be seeing a lot more advisors named as defendants.
The specific allegations are that Cammack used the wrong benchmark in evaluating the funds and didn’t recommend eliminating two poorly performing TIAA-CREF funds or advise the committee that float income and securities lending income were part of provider compensation. The complaint quotes a Cammack advisor as having previously stated that the weighted Morningstar benchmark used to evaluate fees would be inappropriate for a large plan. This benchmark included mostly retail share classes, whereas the large NYU plan should have been able to leverage its size to qualify for a share class with lower fees.
Advisors and Company Fiduciaries are a Team.
Of course, you can never assume that all of the allegations in these complaints are true, and Cammack says it will defend the suit vigorously. But there are some actions that, if taken, would put an advisor and a co-fiduciary plan committee in a better position to defend plan choices. Here are some suggestions how advisors and committees can work together effectively to limit (but not eliminate) liability exposure:
- Understand that the advisor hasn’t assumed all responsibility. Too many plan sponsors and committees hear that an advisor will be a fiduciary (and they shouldn’t have one who isn’t) and don’t read the fine print in their service agreements. Advisor agreements typically say they will be “co-fiduciaries” with the plan’s internal fiduciaries. This means these advisors aren’t assuming all of the responsibility for investments and fees. They make recommendations, but don’t have the ultimate decision-making authority. Committee members take responsibility for what is done.
- If you are a company fiduciary, ask questions about the basis for the advisor’s recommendations, and never just rubber stamp the recommendations. If they don’t make sense to you, you can delay a decision until more information is provided. But pay attention to an advisor’s warnings. In an early decision in Tussey v. ABB, one of the major fee cases, the court found it significant that the fiduciaries didn’t heed Mercer’s warnings about high fees.
- If you are an advisor, keep and share written records of the basis for your recommendations.
- Make sure your plan benchmark is an appropriate one. You don’t want to be comparing apples and oranges and size matters in trying to determine what level of fees is reasonable.
- Make sure that the different alternatives available to the plan are evaluated and discussed, particularly if you haven’t considered them before. The investment landscape keeps changing, and options such as collective trusts and managed accounts are attracting a lot of interest now.
- Make sure that there are good Minutes recording the reasons for all Committee decisions.
- Make sure that the committee members know how to analyze fees.
One final tip for company fiduciaries: don’t forget to review your advisor’s performance and benchmark your advisor’s fees on a regular basis. Even if you are happy with your current advisor, you will want to do regular rfp’s for advisors. You can invite your current advisor to participate so that you will have a basis for an objective evaluation and, where appropriate, for renegotiating fees and services with your advisor (or picking a new one). Your advisor should understand why you are doing this. Don’t just rely on the advisor’s benchmark of its own fees.