Emboldened by wins against large 401(k) plan sponsors like Boeing, Cigna, Caterpillar and Cigna, plaintiff’s attorney Jerome Schlichter recently filed suit against an HR outsourcing company and their discretionary trustee claiming breach of fiduciary responsibility. Specifically, the lawsuit claims that Insperity 401(k) Plan with over $2 billion in assets and 85,000 participants allowed the discretionary trustee, Reliance Trust, to select their own investments which had limited history, high fees and poor performance.
Insperity provides HR outsourcing services to smaller companies including employee benefits, payroll, HR administration, healthcare and workers comp along with 401(k) services. Reliance Trust, a subsidiary of FIS, a publically traded technology company focused on banking and payment processing, provides back office trust services to financial service companies and, apparently, investments to 401(k) plan sponsors.
Though the employers using Insperity were not named, the employees of those numerous companies are the plaintiffs in the suit filed by Schlichter.
The meat of the suit centers around the fact that Reliance, which had the discretion to select investments, picked their own funds which were claimed to have high fees, giving Insperity excessive revenue sharing, and poor performance. In particular, the Reliance target date funds were selected even though they were created a week before.
There are a few lessons here, although the case is far from being resolved. Insperity outsourced the selection of investments to a fiduciary trustee but they still have the duty to monitor as discussed in a previous 401kTV post. Secondly, a discretionary trustee that selects its own investments is suspect at best especially for investments that have high fees, poor performance and very limited history.
Many 401(k) record keepers offer better pricing in the form of higher revenue sharing to plan sponsors if they use the record keeper’s proprietary funds. Though the record keeper is generally not considered a fiduciary because the plan or their advisor selects the investments, it certainly raises questions of that fiduciary making the selections and puts a greater burden on due diligence and monitoring of higher revenue, proprietary funds. The pending DOL conflict of interest rule may change who is considered a fiduciary opening up the definition to more parties.
Many PEOs and outsourced HR firms look at their 401(k) as an afterthought generally offering limited and underperforming investments. Maybe this lawsuit will cause the employers using these services to pay more attention.
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