Lawsuit against Financial Engines a red flag for plan sponsors

Patent infringement claims mean plan sponsors should be vigilant and ready to reassure plan participants

Aug 11, 2014 @ 11:22 am

By Darla Mercado

+ Zoom

A new lawsuit against Financial Engines for alleged patent infringement is in its early stages, but plan sponsors who work with the 401(k) service provider ought to keep the case on their radar.

On Friday, GRQ Investment Management filed suit against Financial Engines Inc. and Financial Engines Advisors in the U.S. District Court for the Eastern District of Texas, claiming Financial Engines infringed on a pair of patents belonging to GRQ. Financial Engines provides personalized fiduciary advice to employees of the plan sponsors it works with.

(More: Where does Financial Engines rank in the 15 fastest-growing fee-only RIAs?)

Per the lawsuit, GRQ owns two patents listed as “Systems and Methods for Improving Investment Performance.” They include US Patent No. 7,120,600, which GRQ has owned since Oct. 10, 2006, and US. Patent No. 8,229,825, which it has owned since July 25, 2012.

GRQ claims Financial Engines violated the patents in a variety of ways, including by providing a system for discretionary asset allocation and providing a method for distribution suggestions for investors.

GRQ describes itself as a firm “formed to monetize the inventions of the late Brian Tarbox and Mark Greenstein.” Both of these men are listed as inventors of the two patents, according to GRQ.

GRQ alleges that in 1996 Mr. Tarbox helped Financial Engines founder William Sharpe secure funding for Financial Engines “by providing him an initial business model and explaining this model to at least one third party,” according to the suit.

The plaintiffs requested the court enjoin Financial Engines from providing its services.

As of Monday afternoon, Financial Engines hadn't been served with the lawsuit, noted company spokesman David Weiskopf.

“We haven't been contacted in any way,” he said. “Our legal counsel has checked repeatedly.”

That said, 401(k) experts say plan sponsors and advisers working with Financial Engines ought to keep an eye on the case.

“Larger Fortune 500 companies should be quite aware of the issues concerning the vendors, especially the product that the vendor is selling,” said Marcia Wagner, an attorney at The Wagner Law Group. “Ask if Financial Engines has a defense: Are they going to negotiate with these people? Will they be enjoined, and if so, what do we tell our participants?”

The Department of Labor has made it clear that plan sponsors are expected to examine a provider for disciplinary and litigation activity as part of the due diligence process, noted Jason C. Roberts, CEO of Pension Resource Institute.

(Related: GAO report calls for more disclosure of managed accounts in 401(k)s)

In the event a provider is enjoined from an activity, plan sponsors should have a back-up plan — even if the activity in question doesn't hurt the retirement plan and its assets.

“This isn't one of those situations where harm is caused to the plan,” Mr. Roberts said. “This relates more to the viability of service and the ability of the provider to provide that service than it does some kind of harm that could be realized by the plan and participants.”

Mr. Roberts said an injunction would be unlikely in the Financial Engines case, but it doesn't hurt for plan sponsors to do a little homework and find out how their services would be affected if the suit proceeds.

“I would want assurances that the accounts don't stop being allocated and rebalanced, and that the software will continue to work when new people enroll next month,” Mr. Roberts said. “This is more practical than something that's hard coded in [Employee Retirement Income Security Act rules].”

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