Lawsuit Alleges 401(k) Provider Violated ERISA for Self Gain

A lawsuit filed against managed account provider Stadion Money Management and insurer United of Omaha alleges the two violated their ERISA fiduciary duties by conspiring to direct participant savings to expensive, affiliated funds for their own benefit.

According to the complaint, “Stadion breached its fiduciary duties by making investment decisions to further its own interests and the interests of United of Omaha,” and as a result they “cost participants millions of dollars in losses due to excess fees and investment underperformance.”

It claims that Stadion directed participants’ accounts into United of Omaha- and Stadion-affiliated investment options, “despite the availability of lower-cost, higher-performing investment options within the plan that would have better met the needs of participants.”

The suit also said there were identical options available in the plan menu that would have charged 50% less in fees. The plaintiffs allege that Stadion avoided these options because they did not generate as much revenue for business partner United of Omaha.

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“Stadion financially benefited itself and United of Omaha by continuing to use Stadion-affiliated accounts despite their underperformance on both an absolute and risk-adjusted basis,” the suit said.

The plaintiff, Kimberly Davis, worked for amusement park company Palace Entertainment and participated in its 401(k) retirement plan, which offered investments through a United of Omaha group variable annuity contract, and included Stadion’s managed account service.

The lawsuit claims Stadion has built its fortune on fees. It said the company accumulated approximately $445 million in assets under management during its first 10 years, but then grew to over $5 billion over the next 10 years. The suit alleges that this growth was “based not on the strength of its investment management acumen, but on its relationships with insurance companies who market group annuity products to small and midsize retirement plans.”

The complaint acknowledges that it is not unusual for a managed account provider to depend on another provider to pitch their service to employers, or to split the managed account fees such as Stadion does with United of Omaha.

“There is potential for abuse, however, if a managed account provider can confer additional benefits on its marketing partner or itself by selecting certain investment options over others for participants,” said the lawsuit. “Unfortunately, that is what happened here.”

Stadion Money Management denied the allegations, saying it did not violate fiduciary obligations to its plan participants.

“We find many of the allegations are implausible and, frankly, don’t make sense,” said the company in a release. “Lawyer-driven lawsuits like this, unfortunately, have become commonplace and companies like Stadion are frequently targeted by the plaintiffs’ bar. We intend to vigorously defend the case because the claims are meritless and are confident the matter will be resolved in Stadion’s favor.”

In a similar case, asset manager American Century Investments recently won a class action lawsuit that had accused the firm of violating its ERISA duties by profiting from its 401(k) plan at the expense of its employees by only offering its own mutual funds in the plan. In the court’s ruling, the judge said that it is common for financial service companies to offer their own investment funds in their retirement plans, and that there is no requirement to offer more than one investment company’s funds.

A worldwide drop in pension assets in 2018 sees defined contribution (DC) funds total more than their defined benefit (DB) counterparts, a first for the pension world.

Global retirement assets fell by 3.3% at year-end to $40.1 trillion from $41.5 trillion in 2017, according to a study by Willis Towers Watson’s Thinking Ahead Institute. Much of this -5.7% annual return (benchmarked against a traditional 60/40 investment portfolio) was in relation to the rough patch equities hit in Q4. The research was conducted around the top 22 pension markets in the world, known as the P22.

DC plans, which usually offer 401(k) options and other enrollment-based investing options in regard to their traditional DB counterparts, take up more than 50% of total assets in the largest seven markets.

This newfound phenomenon is due to several factors, the main being where the most DC money lies.

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The top seven markets account for 91% of the P22 (Australia, Canada, Japan, the Netherlands, Switzerland, the US, and the UK), but in that “P7” Group, there is but one king.

That title goes to the US, which lists a whopping 61.5% of worldwide retirement assets. This dwarfs Japan (7.7%) and the UK (7.1%), the number two and three slots. Since America holds the most assets, it also affects their breakdown.

That includes defined contributions, which represents 62% of the nation’s pension assets. Since the DC option is cheaper than maintaining defined benefit liabilities, which grow as they are paid out to each new retiree, DC has become increasingly popular for companies. In 2018, defined contribution assets grew 8.9% while defined benefits only increased by 4.6%, according to the survey.

“When pension plans are considered the be-all and end-all of retirement living, the US was booming in population [and] booming in industry,” John Delaney, a portfolio manager at Willis Towers Watson, told CIO.

He said if you compare the size and pension boom of the US with that of smaller countries such as the UK and Japan, you’ll see the US being “fairly outsized in terms of the assets within the defined benefit defined/contribution space that make up the pension plan assets.” This is because the other countries in the P22 didn’t see that pension boom at the same time as America.

The average asset mix for the P22 is 40% equities, 31% bonds, 26% in other assets, such as private equity, real estate, and hedge funds. Cash takes up the last 3%.

For equities, Australia and the US are the top shareholders in the bunch, allocating 47% and 43% of their portfolios to the space. The UK, the Netherlands, and Japan are more inclined to bonds, at 52%, 53%, and 58%. Switzerland is neutral, as usual, having a mostly even mix of stocks, bonds, and alts.

That said, stocks are not as hot as they used to be. Thinking Ahead marked a 20 percentage point drop in equities over a 20-year period (from 60% to the current 40%), which has been almost totally replaced by a 19 percentage point shift to alternatives.

“I think largely what you have is you’ve seen plans in particular have a pretty good run in their recovery from the global financial crisis in equities and bonds,” Delaney said. “What we haven’t seen necessarily, especially in the corporate world, is improving their funding levels a ton despite their rock star returns in equities and bonds.”

He noted that investors are trying to essentially take profits from high-performing spaces and reallocate to others (namely, alts) that are more of a “potential source for returns more so than equities or bonds right now given where valuations are.”

Bonds, however, have gotten the “if it ain’t broke, don’t fix it” treatment from the P7, remaining a consistent 31% allocation for the past 20 years.

“You’re not getting the yield that you need on those investments (bonds) to earn enough return to reach your benefit payment needs, your outflows that you need, or [to] improve your funding levels,” he said. “They’re looking to alternatives as an additional source for return for lack of a better word.”

Tags: Defined Contribution, P22, Pension, Thinking Ahead Institute, US, Willis Towers Watson