An advisor has a meeting with his/her client. During the meeting, the client says to the advisor, “I received papers in the mail from a law firm stating they settled a lawsuit against our service provider. All I have to do is sign these papers and I’ll receive $XXX dollars. What should I do?”
Many advisors would simply say sign the papers and move on. But the moral of this story is this: that’s the wrong answer. Instead, the advisors should remind clients that any legal matters should be reviewed by legal counsel before making a decision. To do otherwise is to take on unknown risks that could be materially significant. The reason why an advisor should take this position is best exemplified by a recent case involving a reputable and nationally recognized Retirement Services Provider (known as an “RSP” for remainder and purposes of this article only), and their clients.
The RSP was sued by a class of plan administrators who have a group annuity contract or group funding agreement with the RSP The plaintiffs alleged that:
(1) The RSP has included certain mutual funds as investment options based on the funds’ revenue sharing payments to the RSP rather than the funds’ potential to benefit the plans
(2) The RSP’s receipt of revenue sharing payments constitute prohibited transactions under ERISA 406(b)(3)
(3) The fees charged by the RSP to the plans do not bear a meaningful relationship to the cost of the services provided, and they thus constitute excessive compensation to the RSP, and
(4) By taking as its compensation the spread between the guaranteed payment and the investment performance of assets in fixed accounts and guaranteed accumulation accounts, the RSP has retained excessive compensation and engaged in self-dealing.
A four-week trial was held in the fall of 2013. Though the decision of the court is still pending, in April 2014, the parties in Healthcare Strategies v. ING Life Insurance and Annuity Co. filed a motion for court approval to settle their lawsuit. The terms of the settlement include a $14,950,000 payment by the RSP in damages and the RSP agreed to significant changes to its business practices regarding fees and revenue sharing.
The plaintiffs’ attorneys requested $6,200,000 in fees and $615,000 in expenses for a total of $6,815,000 out of the $14,950 settlement. The remaining balance of $8,135,000 would be split among the estimated 15,000 plan sponsors equally (with the 15,000 estimate coming from the plaintiffs’ motion for class certification).
In order for the plaintiffs to receive part of the settlement, the RSP required 99% of the class members to agree to the terms of the settlement and release the RSP from a list of claims that do not appear to have a time limitation.
In other words, the settlement includes wording that apparently releases the RSP from all past, present and future claims, even if the conduct occurs after the settlement date. Section 6.1 of the settlement includes the following wording:
6.1 Releases. Upon the Effective Date, the Class Members, on behalf of themselves, their predecessors, successors and assigns, their Plans, and their Plans’ participants and their beneficiaries, shall be deemed to have, and by operation of the Final Order and Judgment shall have, fully, finally, and forever released, relinquished and discharged, and shall be forever enjoined from the prosecution of, each and every Released Claim, whether arising before or after the date of the Final Order and Judgment, against any and all of Defendant’s Released Parties, provided, however, that nothing herein is meant to bar any claim seeking enforcement of this Agreement or Court Orders relating to it.
Assuming 99% agree and that 99% represents 14,850 retirement plans, it is likely each plan will receive approximately $547. But should an advisor recommend a client settle the case when wording in the settlement appears to violate ERISA Section 2: Findings and Declaration of Policy? Section 2(b) in part states:
It is hereby declared to be in the policy of this Act to protect interstate commerce and the interests of participants …and by providing for appropriate remedies, sanctions, and ready access to the Federal courts.
Is it possible this settlement is requiring a plan sponsor to relinquish their legislative right to access the Federal Courts over issues that are not part of this litigation? If so, should an advisor recommend a plan sponsor negotiate away their rights to the federal courts for $547 or any amount? Could the advice to take the money result in a fiduciary breach for the plan sponsor? Could this advice result in liability for the advisor?
Even in the case of a seemingly benign class-action settlement, advisors should inform his/her client to seek legal counsel and protect themselves from complicated and often latent clauses that may violate fiduciary standards.
For more information on legal issues pertaining to retirement plans, visit blog.fraplantools.com and sign up for the Fiduciary Matters Blog. For additional information on how FRA PlanTools supports an advisor’s compliance obligations contact me at 704-564-0482 or firstname.lastname@example.org.