A new trend in ERISA litigation is focusing on voluntary benefits offered to employees, such as medical, vision, and dental. Both the employer and their benefits consultants are being targeted.
These cases are in their infancy, but shed light on an employer’s fiduciary responsibility when selecting any product or service that may be marketed to their employees. The cases do not appear to focus on the quality of the offering, but rather on the compensation structures and incentives when providers promote these products and services. Employers need to understand all sources of compensation related to the sale and promotion of the product, as well as any financial incentives that may favor the placement of one specific product over others.
These cases serve as a reminder to retirement plan sponsors of the fiduciary responsibility associated with voluntary managed account services. Managed accounts are often sold as ‘free’ to the plan. As a voluntary service, only participants who use it incur any additional cost. Even though use of the service is voluntary, offering the service within a retirement plan is a fiduciary decision. Also, once added to the plan, the fiduciary duty requires ongoing monitoring of the service's costs, marketing, and use.
Managed accounts seek to utilize data points such as outside assets, savings rate, risk tolerance, and expected retirement date to develop a personalized investment strategy. Participants electing to use the service are charged an additional fee, typically a percentage of their assets. Even though the benefit is optional, the plan sponsor must be diligent in their selection and ongoing monitoring of the service.
Here are items a fiduciary should consider related to managed account services:
- Fees – The fees charged for managed accounts vary greatly. A plan sponsor must know the cost of the service and must be able to show that they have determined the fee is reasonable compared to other managed account services.
- Marketing – What are the financial or scorecard incentives provided to the financial consultants who are discussing the service with your participants? Are those interacting with employees compensated for recommending managed account usage?
- Utilization – It is important to monitor overall usage of the service. Sharp spikes in utilization may be a sign of increased marketing focused on selling the service.
- Measurable benefit – Can the provider demonstrate that managed account performance results differ from those available through default investment options that do not charge an additional fee?
- Provider Compensation – Managed accounts provide an additional revenue source for the provider. It is critical for plan sponsors to continually monitor that revenue and ensure that when looking at plan fees, they understand the full amount of compensation the provider is receiving, not just direct recordkeeping costs.
Managed accounts may provide a more customized asset allocation for your participants. However, employers should not mistakenly believe that their fiduciary responsibility is reduced because of the service's voluntary component.
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