A managed account provider and a recordkeeper platform have been sued for conspiring to direct participant savings to expensive, affiliated funds.
Plaintiff Kimberly Davis worked for Palace Entertainment in Greensboro, NC and Riverhead, NY, and participated in its 401(k) retirement plan that offered investments through a United of Omaha group variable annuity contract, and also included Stadion’s managed account service. She was a participant in Stadion’s managed account service until March 2013, at which time she received a distribution of the benefits in her account from the Palace Plan, and Stadion canceled her service. Plaintiff’s account would have been worth more at the time it was distributed if not for Defendants’ violations of ERISA.
According to the complaint, during its first 10 years, Stadion accumulated approximately $445 million in assets under management, but over its next 10 years, by 2013, Stadion grew to over $5 billion, according to the complaint – which notes that the primary source of Stadion’s accelerated growth was its managed account service for small retirement plans. However, the suit claims that growth did not come as a result of its strong brand name or performance record – plaintiff Davis alleges that during this period of rapid growth, Stadion changed its name, canceled its longtime service marks, and delivered “underwhelming” results, with independent third-party plan consultants now having “almost universally rejected Stadion-managed investments for their clients,” according to the complaint.
The suit – which is seeking class action status on behalf of “all participants and beneficiaries whose accounts were enrolled in Stadion’s managed account service within a retirement plan administered by United of Omaha for any period of time after January 25, 2013” – claims that “the influence a small plan’s primary service provider has in the selection and retention of a managed account provider creates risk of confused loyalties for the managed account provider.” Moreover, that while “a managed account provider must act solely in the interest of participants, but its marketing partners control whether its services will be offered.”
Specifically, the suit notes that Stadion provides a managed account service to participants in employer-sponsored retirement plans governed by ERISA. Through the service, participants pay Stadion a fee, and in return, Stadion accepts complete fiduciary discretion to manage the participant’s retirement account by allocating the participant’s account balance among the investment options offered within the plan.
If employers include Stadion’s service, Stadion exercises complete discretion over participating employees’ accounts by selecting investments from the menu of options in the employer’s retirement plan. Stadion receives a fee from participating employees, which it shares with United of Omaha and its affiliates.
Potential for Abuse?
Now, as the complaint acknowledges, “it is not unusual for a managed account provider to depend on another provider to pitch their service to employers,” or for the managed account fee to be split between them. “There is potential for abuse, however, if a managed account provider can confer additional benefits on its marketing partner or itself by selecting certain investment options over others for participants,” according to the plaintiffs – which, as one might suspect, is what they say happened here – that the defendants violated ERISA by putting their own interests ahead of retirement plan participants.
Among the specific charges, the plaintiff cites the following:
Stadion’s Investment of the Core Equity Portion of Managed Accounts
The plaintiffs charge that Stadion’s use of its own subaccounts to invest the core equity portion of each managed account added extra costs for participants, and that Stadion could have “instead allocated the core equity portion of participants’ accounts into the index fund subaccounts available in each plan, which would have provided access to the exact same underlying securities at significantly lower cost to participants.”
Stadion’s Investment of the Core Fixed Income Portion of Managed Accounts
In order to pay returns and generate its own compensation, United of Omaha takes the monies deposited in the Guaranteed Account, transfers them to its general account, and invests the monies in a portfolio of fixed income investments – and, to the extent these investments produce income that is higher than the stated returns, that difference is retained by United of Omaha. The plaintiff notes that United of Omaha generally sets the stated return rate at a level that is 1% to 2% lower than the income it expects to earn by investing the underlying assets. “In essence, participants paid United of Omaha five to ten times more for a principal guarantee than that guarantee was worth, unnecessarily slashing their returns in half even though the covered fixed income investments were already low-risk, and similar investments were readily available in each plan without that added cost.”
Stadion’s Investment of the Flex Portion of Managed Accounts
“Stadion-managed subaccounts with at least five years of performance history have underperformed their stated benchmark indices by approximately 0.50% to 2.00% per year since their inception,” the plaintiff claimed. In fact, she alleges that “Stadion’s subaccounts’ risk-adjusted performance was well below that of their benchmark indexes, illustrating that “Stadion’s models and managers have demonstrated no discernable skill in strategically moving assets between markets to attempt to capitalize on market conditions.”
Ultimately, the plaintiffs claim that Stadion directed participants’ accounts into United of Omaha- and Stadion-affiliated investment options, “despite the availability of lower-cost, higher-performing investment options within the plan that would have better met the needs of participants” – including in cases where “…there were identical options available in the plan menu that would have charged 50% less in fees.” The plaintiffs claim that “Stadion avoided these options because they did not generate as much revenue for its business partner, United of Omaha. In other cases, Stadion financially benefited itself and United of Omaha by continuing to use Stadion-affiliated accounts despite their underperformance on both an absolute and risk-adjusted basis.”
Not only did “United of Omaha improperly retained revenue resulting from Stadion’s malfeasance despite knowledge of Stadion’s compromised loyalty and imprudence,” the plaintiffs allege – “Indeed, United of Omaha expected preferential treatment from Stadion in exchange for retaining Stadion as a managed account provider available through its retirement platform.”
Ultimately, the plaintiffs claim that, “based on this conduct, Defendants cost participants millions of dollars in losses due to excess fees and investment underperformance…”.
The case is Davis v. Stadion Money Mgmt., LLC, M.D.N.C., No. 1:19-cv-00119, complaint 1/25/19.