Record Keeper Sued for Alleged Kick-Backs
Participants in the Caterpillar’s 401k plan sued Aon Hewitt for its fee arrangement with Financial Engines (FE), a robo-advisor and managed account provider, seeking class action status. Plaintiffs allege that the record keeper received excessive fees because the revenue sharing arrangement with FE costing plan participants millions of dollars in savings.
Typical of many arrangements with money managers, Aon received a portion of the fees charged by FE to provide advice and managed accounts to plan participants. Though FE does not have a fund per se, it does charge participants a fee to provide advice and guidance under a computer model. FE advices 9 million participants in 700 large plans.
This is the fourth lawsuit against a record keeper receiving fees from FE including Xerox, Fidelity and Voya.
On the one hand, Aon’s arrangement with FE can be viewed no differently than any other money manager who pays the record keeper revenue sharing to offset costs to run the plan. On the other hand, if FE is viewed as an advisor, especially a fiduciary advisor, it would be more than unusual to pay a record keeper to get access to plan participants by paying a portion of their fee to the provider. Under the new DOL conflict of interest rule, more parties will be fiduciaries
The lawsuit against Aon raises issues about revenue sharing in general. Just as with commissions for advisors, it can skew the judgement of the fiduciary to pick investments that pay more but may not be in the client’s best interest. More and more plans are moving away from revenue sharing using institutional funds that do not include these payments.
Which raises another interesting question: Are record keepers fiduciaries under the new DOL rule? Claiming no power in the ultimate selection of the plan’s investment lineup, record keepers had sought to avoid fiduciary liability. But the recent DOL FAQ clearly states that just suggesting a lineup could make record keepers a fiduciary if they limit their suggestions beyond the outline of the plan’s IPS potentially changing the relationship and engagement with that provider. No doubt that selecting an advisor is a fiduciary act which puts all of FE record keeper clients in the cross hairs of class action law firms.
