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Participants Sue Recordkeeper for Advice ‘Kickbacks’

A new lawsuit claims that a recordkeeper forced Financial Engines to charge excessive fees that were, in turn, rebated back to the recordkeeper.

The suit (Chendes v. Xerox HR Sols. LLC, E.D. Mich., No. 2:16-cv-13980, complaint filed 11/9/16), which is seeking class action status, was filed in the Eastern District of Michigan Southern Division by three Ford Motor Co. workers who have accused Xerox HR Solutions Inc. of breaching its ERISA fiduciary duties as part of a fee-sharing agreement with investment adviser Financial Engines Inc. The workers allege that Xerox HR violated ERISA by entering a “pay to play” scheme that wrongfully inflated the price of professional investment advice services that were critical to the successful management of the workers’ retirement savings. The suit claims that the arrangement resulted in payment of excessive fees from the workers’ $14 billion retirement savings plan.

According to the suit, Ford offered the investment advice service among the optional services made available by Xerox HR to the plaintiffs and the other participants in the Ford Plans, and a separate agreement was signed between the Ford Plans and Financial Engines, which contained an acknowledgement that the latter was an ERISA fiduciary with respect to the investment advice program and specified that the fee charged to participants who used the service as a percentage of the value of a participant’s account on a scaled basis.

A Piece of the Action?

“FE and Xerox HR were not content, however, with merely providing participants with access to FE’s services,” the suit claims, going on to claim that, “Xerox HR wanted a piece of FE’s action, and saw an opportunity to take a percentage of the account of every participant choosing to use FE’s services, in addition to the fees Xerox HR was collecting for recordkeeping.” Accordingly, the suit claims that, “in order to be included as the investment advice service provider on Xerox HR’s platform, FE agreed to pay – and is paying – Xerox HR a significant percentage of the fees it collects from Ford’s 401(k) plan investors, like plaintiffs Patrick Chendes, Jillian Smith and Dion Tumminello” (the plaintiffs in the case).

The plaintiffs went on to charge that “for its part, FE was interested in securing an arrangement with Xerox HR to be the exclusive provider of investment advice to participants in retirement plans administered on Xerox HR’s platform, and was willing to charge excessive fees to Plaintiffs and other participants in order to meet Xerox HR’s demand for a kickback.” Fees that the plaintiffs claimed were “not being paid for any substantial services being provided by Xerox HR to FE or to participants of the Plans,” and that while they were “ostensibly for “data connectivity services” as described in “the Annual Return of the Master Trust filed with the EBSA on Form 5500,” they were actually “being paid as part of a so-called ‘pay-to-play’ arrangement; better described in the pejorative as a kickback.” Moreover, that this arrangement “wrongfully inflates the price of FE’s professional investment advice services that are critical to the successful management of workers’ retirement savings and violates the fiduciary responsibility and prohibited transaction rules.”

The plaintiffs claim that FE is paying Xerox HR more than 30% of the fees it receives from the Ford Plans, and that participants in the Ford Plans who opted to use Financial Engines paid FE $5,794,426 in 2015, out of which FE paid $1,840,048 to Xerox HR, with similar indirect fee-sharing payments have been made each year since 2012 to Xerox HR by FE.

Asset-Based Fees Challenged

Nor was it only about how much – the suit also takes issue with the asset-based structure of the fees, claiming that “there is no rational justification for an asset-based fee for whatever services Xerox HR provided in connection with FE’s investment advice program.” As has been claimed in other of the so-called excessive fee cases, the suit notes that “the level of Xerox HR’s services to a participant who chooses to use FE’s investment advice service does not increase when that participant’s account has grown through additional contributions or investment gains, yet Xerox HR’s fee will increase in proportion to the increase in the value of the account.”

“In fact,” the suit goes on to state, “since the interface of FE’s advice program with Xerox HR’s recordkeeping system does nothing more than implement investment instructions on behalf of participants in the same manner that participants directly provide investment instructions in the Ford Plans, rights that all participants have simply by virtue of their participation in the Ford Plans, Xerox HR is doing nothing more than providing an electronic mechanism for implementing instructions the participants could implement on their own.”

Quid Pro Quo

The suit goes on to claim that FE’s “quid pro quo for agreeing with Xerox HR to charge an excessive fee for investment advice services so that Xerox HR could receive additional and illegal compensation from the participants in its customer plans was that FE became the exclusive investment advice provider on the Xerox HR platform.”

The suit seeks class action status, a declaration that Xerox HR breached its fiduciary duties, to enjoin Xerox HR from further ERISA violations, to order Xerox HR to make good to the Ford plans losses resulting from its fiduciary breaches, disgorgement of profits, any other equitable relief necessary to restore the plans to the status they would have had, but for the breaches, and the payment of attorney’s fees and expenses.

Schneider Wallace Cottrell Konecky Wotkyns LLP, Berger & Montague P.C. and Miller Law Firm P.C. are representing the Ford participant-plaintiffs.

The suit made claims similar to other cases involving Financial Engines services (though Financial Engines is not a party to any of the suits), including a suit by a participant in the Nestle 401(k) Savings Plan, which has Voya as recordkeeper for the plan, and a suit by a participant of the Northrup Grumman plan who has also challenged the compensation arrangements between their recordkeeper (Hewitt Associates) and Financial Engines.