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Empower Managed Account Participants File Suit

Litigation

A new lawsuit claims that one of the nation’s largest recordkeepers designed a program that—with the help of advisors—encouraged retirement plan participants to move those savings into a managed account offering “to benefit themselves at participants’ expense….”

The suit was filed by Bradley Shaffer, individually, on behalf of his Investment Retirement Account, and Plaintiff Evelyn Birchfield, as representatives of a class of customers of Defendants who are or were invested in an Empower Managed Account from 2015 through the present. They’re suing a long list of related firms—Empower Retirement, LLC, Advised Assets Group, LLC (“AAG”), Great-West Lifeco, Inc. (“Great-West”), Empower Annuity Insurance Company of America formally known as Great-West Life & Annuity Insurance Company, Great-West Funds, Inc. (“GWL”), Putnam Investments, LLC (“Putnam”), and Empower Advisory Group, LLC (“EAG”) (collectively “Defendants”) for breach of fiduciary duties, fraud, and other claims.

More specifically, the suit (Shaffer v. Empower Retirement, LLC, D. Colo., No. 1:22-cv-02716, complaint filed 10/14/22) seeks to represent the interests of hundreds of thousands of members—clients of Empower and/or AAG who are or were invested in a Managed Account from 2015 through the present including Government employee clients of Empower and/or AAG whose deferred compensation plans invested in a Managed Account from 2015 through the present, as well as private and RSG clients of Empower and/or AAG who invested in a Managed Account from 2015 through the present.

Their beef is focused on how they allege Empower positioned advisors in promoting a managed account solution to the exclusion of other options, and what they see are practices that served to obscure the ties between those organizations, and what they see as conflicts of interest in that positioning.

‘Bald-Faced Lie’

“Over the last seven to eight years, Empower has misrepresented to clients that its Advisors are salaried, non-commissioned and ‘objective’ fiduciaries acting in the clients’ best interest. This is a bald-faced lie. The truth is that the compensation Empower’s Advisors receive is directly tied to enrolling participants into Empower’s Managed Account (‘Managed Account’) product,” the suit claims. “Empower further directs its Advisors to only recommend the higher fee Managed Account (which is operated by AAG, a wholly owned subsidiary of Empower’s parent). Indeed, Advisors act in the best interest of Empower rather than their clients.”

And then, “to top it off, Empower fails to disclose and actively conceals to clients that most of the funds owned by the Managed Accounts are wholly owned by Empower’s parent company,” according to the suit. “This allows the Empower consortium to ‘double dip’ on fees—Empower charges a lucrative management fee based on the assets under management in the Managed Account and Empower’s sister companies charge an exorbitant fund management fee for assets held in individual funds. Defendants concealed the relationship between Empower and the Empower-owned funds by naming the funds with an obscure name not connected with Empower such as ‘Putnam’ or ‘Great-West’ funds” (though both the Putnam and Great-West names predated the Empower brand).

The plaintiffs here then claim that “as a direct result of this scheme, Defendants reaped massive and unlawful profits at the expense of hardworking, unsophisticated investors and retirees, like Plaintiffs, who were lured into the Empower-owned, higher fee Managed Account that contained the Empower-affiliated Great West and Putnam funds even though lower cost investments were more readily available.”

‘Vulnerable Unsophisticated Investors’

By way of background to these actions, the suit goes to some detail outlining what it alleges was a program[i] designed to produce those results. They claim that “as profitability of its retirement plan administration business dwindled, Empower instituted a companywide policy requiring the use of fraudulent sales tactics to induce individuals to transfer assets from their low-fee employer sponsored retirement plans to Empower’s higher fee Managed Account product, which contains individual funds owned by Empower’s sister companies.”

The suit claims that Empower “used its knowledge as a retirement plan administrator to identify vulnerable unsophisticated investors and individuals with large account balances nearing retirement as targets for Empower’s sales representatives, who then used manipulative sales tactics and falsely portrayed Empower’s higher-fee Managed Account as the preferred solution without regard to whether the recommendation was in the participants’ best interests.”

As for the alleged misrepresentations, the suit claims that “Empower and its Advisors made material misrepresentations and concealed conflicts of interest,” including a failure to disclose that Empower’s bonus and compensation structure created financial incentives for Advisors to enroll participants into Managed Accounts, that the Managed Account “charged higher fees and generated greater revenue than other lower cost and available alternatives,” that the “proprietary software” and Advisors only recommend the Managed Account, and that the “Managed Account and the basket of funds in the Managed Account [GWF and Putnam funds] share common ownership and financial interest with Empower.”

The suit claims that not only does the Empower consortium earn a “lucrative fee based on the assets under management in the Managed Account, but it also earns a fund management fee based on the amount of assets held in individual GWF funds and Putnam funds”—fees that are often around 80bps, according to the suit. The plaintiffs go so far as to claim that “although done under the guise of ‘rebranding’ Defendants’ recent decision to change the name of AAG, Great West, and Putnam to reflect their true identity (i.e., Empower) confirms the fact that Defendants’ knew what they were doing was misleading. Indeed, Defendants themselves admit the name changes were ‘material’ in their most recent SEC disclosures.”

The suit concludes “plaintiffs and the class members have suffered damages in that, in reliance on their trusted fiduciaries and integrity of the market, they paid Managed Account fees, Great West and Putnam Fund fees, and other fees in connection with enrollment into Defendants’ Managed Accounts. Plaintiffs and the class would not have enrolled in Defendants’ Managed Accounts at the prices they paid, or at all, had they been aware of Defendants’ fraudulent course of conduct including their undisclosed incentive compensation, biases, conflicts of interest, and self-dealing.”

What will the court make of these claims? Time will tell.

NOTEIn litigation there are always (at least) two sides to every story. However factual it may turn out to be, the initial lawsuit in any action is only one side, and one generally crafted toward a particular result. In our coverage you'll see descriptions of events qualified with statements such as “the suit says,” or “the plaintiffs allege” and qualifiers should serve as a reminder of that reality.    

 

[i] The suit claims that “Advisors in Empower’s government markets division are directly compensated based on the volume of assets they transfer into Managed Accounts. Specifically, Advisors receive sizeable annual bonuses based on Managed Account conversions. Typically, 25-35% of the Advisors’ annual bonus is based on the amount of assets transferred into Managed Accounts. Empower sets a hefty annual quota for Managed Account conversions. If the Advisor misses the quota by one dollar, the Advisor does not receive any bonus connected with Managed Account conversions.” As a result, both Empower and its Advisors have a huge financial conflict of interest in connection with the Managed Accounts.

 

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