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Schlichter Expands flexPath Targets

Litigation

The law firm of Schlichter Bogard & Denton has a new target in an excessive fee suit—the plan’s investment advisor.

More specifically, plaintiffs Michelle Mills, Coy Sarell, Chad Westover, Brent Aleshire, Barbara Kershner, Paula Schaub, and Jennifer Silva—who just two months ago filed suit[i] against the plan fiduciaries of the Molina Salary Savings Plan—have now filed suit on behalf of the Plan against Defendant NFP Retirement, Inc. for breach of fiduciary duties under ERISA.

Even more specifically, the suit (Mills v. NFP Retirement Inc., C.D. Cal., No. 8:22-cv-00994, complaint 5/16/22) filed in the U.S. District Court for the Central District of California alleges that, “Instead of acting in the exclusive best interest of participants, NFP caused the Plan to invest in flexPATH’s untested target date funds, which replaced established and well-performing target date funds used by participants to meet their retirement needs. NFP also caused the Plan to pay unreasonable investment management expenses to be charged to the Plan.”

The suit goes on to note that, “by advising the Plan’s fiduciaries regarding the flexPATH’s target date funds, NFP caused millions of dollars in performance losses to all participants who invested in these funds.” How did that happen? The suit claims that the participants “suffered harm to their individual accounts as a result of NFP causing higher-cost versions of the Plan’s investments to be maintained in the Plan. For instance, each of the Named Plaintiffs invested in higher-cost share classes of flexPATH’s target date funds when lower-cost shares were available for the identical investments.”

It goes on to state that plaintiffs Westover and Silva also invested in the Fidelity Low-Priced Stock Fund when lower-cost shares were available to the Plan, and “had the Plan used the lowest-cost shares or versions of the Plan’s investments, every participant’s account would have had fewer investment management fees deducted and would have been of higher value in light of those fees and the investment return on those fees.”

‘Novel & Untested’

As had been alleged in the earlier suit, this one points out that, “When the flexPATH target date funds were launched, their target date fund management style had never been used in any target date fund solution offered in the marketplace. The novel and untested target date fund management style combined index or passive management strategies with multiple glidepaths.”

Beyond that, the suit alleges that “NFP did not disclose to Molina that the flexPATH Index target date funds invested in one or more underlying BlackRock target date funds, nor did NFP present this information for Molina’s consideration prior to the decision to add the flexPATH Index target date funds to the Plan”—and as a result, the suit states that these underlying funds “were not part of the fiduciary decision-making process when determining whether to include or recommend the flexPATH Index target date funds in the Plan.” 

Moreover, it claims that, “because flexPATH invested the underlying assets of the flexPATH Index target date funds in BlackRock target date funds, additional fees were charged compared to the fees that would have been charged to investors had they invested directly in BlackRock’s funds.” The suit argues that the BlackRock LifePath Index target date funds charge 8 bps. In contrast, flexPATH charged Plan participants 24 bps. “This resulted in an additional 16 bps—200% more—to invest in flexPATH’s index target date funds,” the suit continues. The suit also claims that NFP did not disclose the additional fees that flexPATH charged on top of those fees charged by the underlying BlackRock target date funds and thus, “Molina did not consider the additional fees charged by flexPATH.”

That said, the suit argues that the decision to add the flexPATH Index target date funds to the Plan resulted in over $210 million of the Plan’s assets (or 45% of the Plan’s total assets) being transferred to the flexPATH Index target date funds during 2016—which increased to over $360 million (or 57% of the Plan’s assets) as of Dec. 31, 2019.

Conflict of Interest

And, according to the suit, a conflict of interest exists between NFP and flexPATH, and the flexPATH funds are proprietary investment products of NFP and flexPATH. “The ownership structure of NFP and flexPATH illustrates the close affiliation between the two companies. National Financial Partners Corporation (NFP Corporation) owns NFP. NFP Corporation, along with NFP’s Chief Executive Officer (CEO) (Vincent Giovinazzo) and President (Nicholas Della Vedova), own flexPATH. In particular, NFP’s CEO has a 25%–50% ownership interest in flexPATH, and NFP’s President has a 10%–25% ownership interest. flexPATH and NFP are operated by the same corporate officers and headquartered in the same office. The CEO, President, Chief Operations Officer, and Chief Compliance Officer for NFP also hold those positions for flexPATH.”

The suit also claims that the decision to recommend for consideration the flexPATH Index target date funds in the Plan was contrary to the terms of the Plan’s investment policy statement (IPS). The suit states that the IPS specified that the Investment Committee “will select” Plan investments based on certain criteria, which included “returns comparable to returns for similar investment options,” and that for the Qualified Default Investment Alternative (QDIA), the investment selected should have investment performance “at least competitive with an appropriate style-specific benchmark and the median return for an appropriate, style-specific peer group,” “risk-adjusted return measures should be evaluated by the [Investment] Committee and be within a reasonable range relative to appropriate, style-specific benchmark and peer group,” and the “investment manager should demonstrate adherence to the stated investment objective,” among other factors. But, as noted above, “because the flexPATH Index target date funds had no prior performance history when the Investment Committee voted to approve their use in the Plan, NFP’s recommendation to consider those funds for the Plan violated the terms of the IPS.” 

Ignoring IPS? 

Not only did it violate the terms for inclusion, the suit claims that the plan’s IPS also specified criteria when an investment manager (or fund) may be removed, specifically that a fund may be removed when the Investment Committee “has lost confidence in the manager’s ability” to “achieve performance, style, allocation and/or risk objectives” and “maintain acceptable qualitative standards.” Now, arguably “may” doesn’t mean must, but the suit alleges that “at the time the Vanguard Target Retirement target date funds were removed from the Plan and replaced with the flexPATH Index target date funds, and despite the removal criteria for a fund under the terms of the IPS, NFP did not express any loss of confidence in Vanguard’s ability to manage its target date funds used in the Plan.” Moreover, the suit claims that at the time of the switch, “the Vanguard Target Retirement target date funds consistently performed better than peers.” 

Oh, and the suit also claims that the decision to include the flexPATH Index target date funds was “inconsistent with the Scorecard System Methodology developed by NFP to monitor Plan investments, which was incorporated into the IPS.”

In addition, when in October 2020 Molina did replace the flexPATH Index target date funds with the Fidelity Freedom Index target date funds (Premier Class), the suit claims that “by replacing the flexPATH Index target date funds with the Fidelity Freedom Index target date funds, Molina recognized that Fidelity’s target date funds were a prudent alternative to flexPATH’s target date funds.”

Stay tuned. 

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] Schlichter Bogard & Denton LLP is also currently litigating an 8,000-person class action against NFP over the Flexpath funds in a 401(k) plan sponsored by Wood Group US Holdings Inc.

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