Schlichter Bogard & Denton LLP, a law firm in St. Louis, continues to identify targets of class action litigation for fiduciary breaches within retirement plans. Many of the cases pursue the same themes of monitoring costs, vendors, and share classes; it is often an overused and unsuccessful approach. However, not enough attention is placed on two new cases with a more specific target: advisors transitioning into investment managers.
In Miller v. Astellas US LLC and Turner v. Schneider Electric Holdings, Inc., Schlichter identified plans where the investment consultant transitioned from being an investment adviser 3(21) fiduciary to an investment manager 3(38). This type of transition has become more common as plan sponsors look to offload fiduciary responsibility for the plan. In a 3(38) investment manager role, the retirement advisor’s role switches from making recommendations to the plan fiduciary to taking discretion to make decisions about the investment menu. This creates a conflict because in their new role, the 3(38) investment manager can use their discretion to implement proprietary investment products that they have constructed.
At this point, all we have seen is the plaintiff’s version of the story; however, these cases highlight a concern that we’ve expressed for some time. Selecting a 3(38) requires the same, or more, amount of diligence and documentation as retaining any new investment manager within the plan. When the organization aiding you with that selection stands to gain financially from the decision, it calls into question the degree of objectivity they can provide to the sponsor.
Strong and independent consultants are a critical part of the private pension ecosystem, and we fundamentally believe that distributing investment products we manage would conflict significantly with that independence.
These large organizations continue to use their brand and relationship with fiduciaries to enrich their public shareholders; frequently at the expense of the independence their clients require to operate clean and efficient employee benefit plans.