The Schlichter law firm has a new target—in a suit that not only involves a MEP, and a target-date fund family, but an advisor—and allegations of “a profound conflict of interest.”
This time the targets are NFP Retirement, Inc., flexPATH Strategies, LLC, Wood Group U.S. Holdings, Inc., Wood Group Management Services, Inc. (nka Wood Group USA, Inc.), the Committee of the Wood 401(k) Plan, and John Does 1–10,[1] for breach of fiduciary duties and prohibited transactions under ERISA. The plan[2] at Dec. 31, 2019 had $2.4 billion in assets and 18,013 participants with account balances,[3] according to the suit.
The plaintiffs here—former participants of the Wood 401(k) Plan—Robert Lauderdale, Joshua Carrell, Ting Sheng Wang, Leonard Dickhaut, Robert Crow, Aubin Ntela and Rodney Aaron Riggins—all represented by the law firm of Schlichter Bogard & Denton LLP—claim that rather than acting in the exclusive best interest of participants, “the Wood Defendants and NFP caused the Plan to invest in NFP’s collective investment trusts managed by its affiliate flexPATH Strategies, which benefitted the NFP Defendants at the expense of Plan participants’ retirement savings. The Wood Defendants and NFP also failed to use their Plan’s bargaining power to obtain reasonable investment management fees, which caused unreasonable expenses to be charged to the Plan.”
At a high level, those aren’t unusual charges in this type of litigation. However, there were some new elements. Specifically, the suit (Lauderdale v. NFP Ret., Inc., C.D. Cal., No. 8:21-cv-00301, complaint 2/16/21) claims that, “Based on conflicted advice, Defendants added NFP’s affiliated collective investment trusts to the Plan that were managed by an untested investment manager (flexPATH Strategies), and that NFP acted “under a profound conflict of interest in recommending the use of its affiliated investments in the Plan.” More on that in a minute.
Beyond that, the suit claims that “after their removal from the Plan during 2018, NFP seized on the opportunity to replace this loss of revenue by recommending the placement of other affiliated investments in the Plan called the International Stock, Core Bond and Large Cap Value funds.” More specifically, the suit claims that flexPATH Strategies had “limited experience” managing assets when the flexPATH funds were first added to the Plan (not being registered as an RIA until February 2015, and did not begin managing assets until June 2015). However, the suit claims that “shortly thereafter” (in December 2015 and January 2016), flexPATH Strategies launched the flexPATH Index target date funds, which were included in this particular plan within six months of their inception.
The plaintiffs allege that in recommending flexPATH funds in the Plan, “NFP acted under a profound conflict of interest between acting in the exclusive best interest of Plan participants as the Plan’s fiduciary investment advisor while also seeking to grow its collective investment trust business through flexPATH Strategies and maximize its revenue through investment advisory fees collected from the flexPATH funds.” As other suits have alleged regarding the recommendation of proprietary funds, this suit alleges that NFP “had an incentive to recommend investment vehicles offered by flexPATH Strategies because it receives additional compensation when its clients invest in those vehicles, such as in the form of bonuses and other incentives for the individual NFP investment advisors whose clients invest in affiliated products or services.”
This recommendation “resulted in an immediate and substantial transfer of approximately $565 million of the Plan’s assets into these brand-new, untested target date funds”—which the suit claims “substantially increased NFP’s and flexPATH Strategies’ assets under management in these investment vehicles, which materially benefitted their retirement business by enhancing the marketability of these new funds.” As for how much—the suit claims that while as of Jan. 1, 2016, NFP and flexPATH Strategies “attracted only $77.7 million in qualified plan assets,” by the end of that year not only had this particular plan added $552.8 million in assets to these investments “by year-end 2016, the Plan’s assets represented the majority of the assets invested in the flexPATH Index Moderate funds.”
Nor does the suit limit its criticisms to the flexPATH target date funds. Similar allegations were made regarding the International Stock, Core Bond and Large Cap Value funds which the suit claims did not exist until 2017 or 2018. “As a result of NFP’s conflicted advice,” the plaintiffs assert, “the Plan immediately transferred approximately $159 million in these newly established funds less than one year after their inception. Like the flexPATH target date funds, the Plan’s substantial transfer of seed money to these affiliated investments materially benefitted NFP and flexPATH Strategies.” With regard both to the flexPATH funds and the other funds in question, the plaintiffs also took issue with the “additional layer of fees” beyond that of a direct investment in the underlying funds.
That said, the plaintiffs hadn’t exhausted their issues with the flexPATH funds, alleging that “the flexPATH target date funds utilized a novel and untested target date fund management style by combining index or passive management strategies with multiple glidepaths,” and that “when the flexPATH target date funds were launched, their management style had never been used in any target date fund solution offered in the marketplace.” This appears to be at least in part a reference to the incorporation of risk profiles along with the standard target-date focus, which the plaintiffs argue by basically tripling the number of fund options, “adds further complexity to the fund lineup from which participants select options to invest for retirement.”
The plaintiffs assert that “a prudent and loyal fiduciary would not have selected the flexPATH target date funds without a five-year performance history to assess the investment manager’s ability to provide superior long-term investment returns relative to prudent alternatives available to the Plan. That is especially so when the investment manager (flexPATH Strategies) had less than one year of actual experience managing assets and the decision to add the funds financially benefitted the Plan’s fiduciary investment advisor (NFP).” Moreover, they claim that “there was no loyal or prudent reason to place the flexPATH target date funds in the Plan, which were managed by an inexperienced investment manager under a novel and untested target date fund investment strategy.”
And lest you wonder where the five-year criterion came from—the suit argues that it was in the plan’s own investment policy statement (IPS), and that “for target date fund strategies, the IPS required a five-year performance history for funds to be included in the Plan. Because the flexPATH target date funds did not have a five-year performance history, the Fiduciary Committee was unable to evaluate the funds in accordance with its own investment criteria.”
As we have seen in other litigation, even a shift away from the challenged structures was seen by the plaintiffs as an admission of sorts. “The Wood Defendants recognized the prudence of using Vanguard as the Plan’s target date fund manager,” the suit notes. “As of Dec. 31, 2018, the Wood Defendants replaced the flexPATH target date funds with the Vanguard Target Retirement Trust Plus target date funds. The Wood Defendants only came to this conclusion after they subjected Plan participants to an untested target date fund solution that put at risk hundreds of millions of dollars of participants’ retirement savings. This decision caused Plan participants to lose substantial retirement savings.” As for the implications, the suit claims that “had the Wood Defendants used the Vanguard alternative rather than the flexPATH target date funds, Plan participants would not have lost in excess of $17.6 million of their retirement savings.”
All in all, the plaintiffs argue that “the Wood Defendants and NFP caused the Plan to pay unreasonable investment management fees,” and that—as is common in this type litigation—“given the Plan’s size, the Plan had tremendous bargaining power to obtain share classes with far lower costs than that of higher-cost shares. Lower-cost share classes of mutual fund and collective investment trust investments were readily available to the Plan. Minimum investment thresholds for the lowest-cost institutional shares are routinely waived by the investment provider even if not reached by a single fund.”
Ultimately, the plaintiffs allege that the Wood Defendants breached their fiduciary monitoring duties by, among other things:
1. failing to monitor their appointees and delegees, to evaluate their performance, or to have a system in place for doing so, and standing idly by as the Plan suffered enormous losses as a result of their appointees’ imprudent actions and omissions with respect to the Plan;
2. failing to monitor their appointees’ fiduciary process, which would have alerted any prudent fiduciary to the potential breach because of the imprudent investment options in violation of ERISA;
3. failing to ensure that the monitored fiduciaries considered the ready availability of comparable and better performing investment options that charged significantly lower fees and expenses than the Plan’s investments; and
4. failing to remove appointees and delegees whose performance was inadequate in that they continued to allow unreasonable fees to be charged to Plan participants or imprudent investment options to be selected and retained in the Plan, all to the detriment of Plan participants’ retirement savings.
“As a direct result of these breaches of fiduciary duty to monitor, the Plan suffered substantial losses,” they allege. “Had the Wood Defendants and the other delegating fiduciaries discharged their fiduciary monitoring duties prudently as described above, the Plan would not have suffered these losses.”
In response to the lawsuit, we received the following comment from NFP Retirement/flexPATH Strategies: “NFP Retirement and flexPATH Strategies have two central goals: to enhance retirement processes for our clients and improve outcomes for their participants. Our respective companies have years of experience and work with outside counsel to ensure that the services and processes offered are compliant with all state and federal regulations.
“The allegations of fiduciary breaches asserted against NFP Retirement, flexPATH, and one of our largest retirement plan clients in a lawsuit filed recently in California are without merit. The lawsuit contains numerous inaccuracies pertaining to our fees, services, and processes.
“NFP Retirement and flexPATH Strategies intend to defend against plaintiffs’ allegations vigorously, and are confident that the compliance protocols and business processes that are currently in place not only meet all state and federal statutes and regulations but also drive better outcomes and value for our clients.”
NOTE: In 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.
Footnotes
[1] Plan fiduciaries unknown to Plaintiffs who exercise or exercised discretionary authority or discretionary control respecting the management of the Plan, exercise or exercised authority or control respecting the management or disposition of its assets, or have or had discretionary authority or discretionary responsibility in the administration of the Plan and are fiduciaries under 29 U.S.C. §1002(21)(A)(i) and (iii).
[2] The plan in question was a multiple employer plan, or MEP. There were 24 adopting employers in 2014, and 15 in 2019, according to the suit.
[3] This multiple employer plan (MEP) had grown rapidly through acquisitions; in 2013 it had just $261.7 million in assets and 4,997 participants with account balances.
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