Financial Engines – or more precisely, the firm’s financial arrangements with a recordkeeper – has once more found itself named in litigation.
The lawsuit, filed Jan. 27 in the U.S. District Court for the Northern District of Illinois (Scott v. Aon Hewitt Financial Advisors LLC, N.D. Ill., No. 1:17-cv-00679), claims that at defendant Hewitt Associates’ urging, plaintiff Cheryl Scott, a retiree and participant in the Caterpillar Plan – “and thousands like her in the Caterpillar Plan and other similarly-situated retirement plans for which Hewitt provided recordkeeping services” purchased retirement investment advisory services for an additional fee. “Each quarter, Ms. Scott and other Plan participants paid a considerable service fee from their retirement accounts for this advice,” according to the suit.
In fact, plaintiff Scott paid Financial Engines, and, after 2013, AFA, a “hefty fee” based on the size of her retirement account, according to the suit. That said, the suit claims that “…at no time during the period when Financial Engines was providing investment advice directly to Caterpillar Plan participants did Hewitt directly notify Ms. Scott or other similarly-situated Plan participants that Hewitt was taking a 20-25% kickback on the amounts paid to Financial Engines for ‘managed services.’” However, the suit notes that in the annual report of the plan filed with the Labor Department it was revealed that Hewitt as receiving 25% of the advice fee paid, and 20-25% of the managed account fee paid to Financial Engines.
Structure Change
But then, the suit claims that Hewitt, out of concern that what it called “this kickback information,” was at risk of being discovered through the required public disclosures that were increasingly becoming available in online repositories, Hewitt and Financial Engines in 2014 “changed the structure of their arrangement to hide from public scrutiny the kickback fees that Hewitt was receiving from Financial Engines,” reconfiguring things such that Hewitt’s newly incorporated sister company, AFA, purportedly became the entity that would provide the advisory services, though “…for all intents and purposes – Financial Engines continued to do all the actual work related to the investment advisory services that Ms. Scott and similarly-situated participants in the Plans were receiving.” In support of this claim, the suit references AFA’s Form ADV which said, “We (AFA) rely exclusively on the proprietary software systems and methodology developed and maintained by Financial Engines Advisors LLC…to create target allocations for participants.”
“By having the Plans’ sponsors ‘hire’ AFA in lieu of Financial Engines, and then having AFA enter into a sub-advisory agreement with Financial Engines … the Hewitt Defendants were no longer required to report the fees they received from Financial Engines. Instead, AFA simply skimmed 20-25% off that fee for the Hewitt Defendants and paid the balance to Financial Engines as a sub-advisory fee,” according to the suit.
And while Caterpillar as plan sponsor picked Hewitt as recordkeeper, “…if a Plan sponsor wanted to take part in the participant-level investment advice and managed account programs from the suite of available services, it had no choice but to accept Financial Engines as the provider – together with the (undisclosed) unlawful fee-sharing arrangement complained of herein.”
Fiduciary Claim
Recordkeepers, of course, are generally deemed to be agents of the plan sponsor/fiduciary, and not an independent fiduciary in their own right. However, the suit claims that since Hewitt picked Financial Engines, negotiated all of the terms and conditions of the agreement with Financial Engines, and because the selection of a plan service provider is a fiduciary function, “the Hewitt Defendants are fiduciaries to the Plans with respect to the investment advice services and the agreement with Financial Engines.”
The suit goes on to argue that there “is no rational justification for an asset-based fee for the minimal fixed level of service the Hewitt Defendants provide in connection with Financial Engines’ investment advice program” (which the suit says is “little more than simply making the program available”), and that even though those services do not increase when that participant’s account has grown through additional contributions or investment gains, the fee AFA receives does, in proportion to the increase in the value of the account, even though, according to the suit, “…the interface of Financial Engines’ advice program with Hewitt’s recordkeeping system does nothing more than implement investment instructions on behalf of participants.” Said more simply, the plaintiffs allege that “an asset-based fee for a fixed level of service is unreasonable.”
This is not the first time the arrangement between Financial Engines and a recordkeeper has been challenged – similar arrangements have been noted in several recent lawsuits, including ones involving Aon Hewitt, Xerox HR Solutions and Voya. Additionally, at least one ERISA litigation firm has gone public with its interest in filing litigation against similar arrangements with Financial Engines.
