When a federal trial court dismissed Hanigan v. Bechtel Global Corp. earlier this year, it sent a favorable message to advisors, record keepers and providers who are working together to bring managed accounts to more retirement plan participants. The Bechtel opinion is an important one for advisors at two distinct and seemingly incompatible levels: (1) it doesn’t necessarily say as much about managed accounts as one might initially think; and (2) at the same time, its scope is likely broader than managed accounts. As retirement plan advisors seek to grow their retirement books and revenue, it’s important to understand how to capitalize on what the court said (and didn’t say).
General Background. The Bechtel fiduciaries had designated a managed account service as the plan’s qualified default investment alternative (QDIA). At one recent point in time, approximately 63% of the plan participants were enrolled in the managed account service. The plaintiffs alleged that the fiduciaries had breached their duties by designating a managed account service—instead of target date funds—as the QDIA. They reasoned that TDFs are significantly cheaper and provide a similar asset allocation to managed accounts in the case of a participant who does not provide personalized information to guide the asset allocation.
What the Court Said. The court granted the fiduciaries’ motion to dismiss. It concluded that the participants had not met their duty to plead a “meaningful benchmark” that supported their contention that the managed account fee was excessive. It reasoned that TDFs are not comparable to the managed account service, finding that the TDFs consider only one factor while the managed accounts considered several additional factors, including risk tolerance, account balance, outside assets, gender, salary and Social Security income. The court also recognized that the Department of Labor’s QDIA regulations expressly permit the selection of a managed account as a plan’s QDIA.
What the Court Didn’t Say. On its surface, the Bechtel opinion is a huge win for managed accounts. Notably, though, the court did not analyze whether the managed accounts’ fees were reasonable. Instead, it dismissed the case on the procedural ground that the participants’ complaint had not met applicable pleading standards. Simply put, the opinion stands for the proposition that TDFs are not a meaningful benchmark for managed accounts, but it should not be considered to stand for the position that the Bechtel plan’s fees were reasonable. The court simply didn’t get that far.
Broader Scope? Despite that limitation, the Bechtel case provides several supportive principles for plan fiduciaries and advisors, including:
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Highlighting a key distinction between the levels of personalization provided by TDFs and managed accounts, respectively;
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Reinforcing a prior court’s conclusion that comparing active and passive funds is like “comparing apples and oranges;”
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Consistent with recent litigation outcomes, acknowledging that ERISA requires “reasonableness” and not “cheap,” which supports fiduciaries’ ability to offer higher-priced services that deliver value to participants.
It may also be helpful for plan fiduciaries and advisors to consider how similar allegations may proceed in the event plaintiffs are able to plead a meaningful benchmark. In such a case, have the fiduciaries monitored the services and fees? Have they benchmarked those services and fees for reasonableness? Have they memorialized those efforts? Advisor-managed accounts continue to be the wave of the future, provided that advisors apply lessons from cases like Bechtel in ensuring fiduciaries are meeting their responsibilities.
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