Robo-Advisers Steer 401(k) Plan Litigation Trend

Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...

By Carmen Castro-Pagan

Robo-advisers—companies that provide digital financial advice—are winning ground in the retirement plans industry, but with that growth comes some legal challenges.

Since 2008, nearly 140 digital advisory companies have emerged, with more than 80 of those founded in the past two years, according to a 2016 study by financial management firm BlackRock Inc. “More clients are asking for this service for their participants,” David Whaley, a partner at Thompson Hine LLC who advises plan sponsors, told Bloomberg BNA Feb. 3.

The Obama administration’s Department of Labor viewed robo-advisers as a tool to help participants with smaller retirement savings accounts reach their investment goals. With the proliferation of these financial advisers and the uptick in plan fees litigation under the Employee Retirement Income Security Act, it was only a matter of time until class actions arose challenging the fees record keepers pay to robo-advisers.

New Trend in Plan Fee Litigation

Since May 2016, five lawsuits have been filed challenging revenue-sharing agreements between plan record keepers and online financial advisory firm Financial Engines. The lawsuits target some major players in the financial advisory world. Four of these lawsuits have been filed against Fidelity Management Trust Co., Voya Financial Inc., Xerox HR Solutions LLC and Aon Hewitt Financial Advisors LLC by participants in 401(k) plans sponsored by Delta Air Lines Inc., Nestle S.A., Ford Motor Co. and Caterpillar Inc.

The lawsuits’ main allegation is that the record keepers collected unreasonable and excessive fees by entering a “pay-to-play” scheme that inflated the price Financial Engines charged to participants who enrolled in its services. Despite having been named a plan fiduciary in these lawsuits, Financial Engines hasn’t been named a defendant in any of them.

Another lawsuit, by participants in Northrop Grumman Corp.'s retirement plan, challenged the fee scheme between Aon Hewitt and Financial Engines. The lawsuit was dismissed last month by a federal judge in California because the participants didn’t allege that they paid for Financial Engines’ services. However, the judge granted the participants leave to amend their claim.

The focus of the litigation is that record keepers are receiving compensation for services they either aren’t providing or they’re providing services that are worth less than they’re being paid for, Todd Collins of Berger & Montague P.C. told Bloomberg BNA Feb. 3. Financial Engines has agreements with a number of record keepers that are providing services for a very large number of plans, said Collins, who is one of the attorneys representing classes against Voya, Aon, Fidelity and Xerox.

How to Avoid Legal Challenges?

Until now, lawsuits have only targeted record keepers and plan sponsors, but companies that provide online financial advice should pay attention. Lawsuits challenging fee schemes between robo-advisers and record keepers will continue, and both parties can take some action to avoid some conflicts.

Robo-advisers may face the same challenges as record keepers under federal law, David Levine, regulatory counsel to the Plan Sponsor Council of America and attorney at Groom Law Group in Washington, told Bloomberg BNA Feb. 6.

Plan sponsors and robo-advisers can avoid conflict by looking into their money flow, working on their disclosures and following ERISA requirements, Levine said.

Another approach is to avoid third-party relations with retirement plans. The more independent the robo-adviser, the more insulated it can become from challenges, Thompson Hine’s Whaley said. Robo-advisers can also look into selling their products directly to plan sponsors instead of selling them through other parties, Whaley said.

As for plan sponsors, they can avoid legal challenges and conflicts by deciding to contract directly with the robo-advisers instead of doing so through a record keeper, Whaley said.

To contact the reporter on this story: Carmen Castro-Pagan in Washington at

To contact the editor responsible for this story: Jo-el J. Meyer at

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

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