Another 401(k) record keeper sued over ‘pay to play’ scheme with Financial Engines

Xerox HR Solutions, one of the largest record keepers for defined contribution plans, has been sued over an alleged pay-to-play scheme with managed-account provider Financial Engines Inc., following similar lawsuits filed recently against other prominent record keepers.
The so-called “conspiracy” between the two companies caused participants in the retirement plans of Ford Motor Co., with aggregate assets of $14 billion, to pay excessive and unreasonable fees, according to the proposed class-action lawsuit, Chendes et al v. Xerox HR Solutions.
Plaintiffs, a trio of participants in the Ford plans, allege Xerox took a “kickback” from Financial Engines in return for inclusion of the investment adviser on the record-keeping platform, an arrangement that “wrongfully inflates the price of FE’s professional investment advice services.”
Financial Engines offers participants investment advice services through a subsidiary, Financial Engines Advisors.
“FE and Xerox HR were not content … with merely providing participants with access to FE’s services. Xerox HR wanted a piece of FE’s action, and saw an opportunity to take a percentage of the account of every participant choosing to use FE’s services, in addition to the fees Xerox HR was collecting for record keeping,” according to the complaint, filed Wednesday in Michigan district court.
Participants who used Financial Engines’ services in 2015 paid the provider $5.8 million, of which $1.8 million, or 31%, went to Xerox, according to plaintiffs. They say similar payments were made since 2012.
Despite a “significant percentage” of Financial Engines’ fees being paid to Xerox, such fees were not “paid for any substantial services being provided by Xerox HR to FE or to participants of the plans,” plaintiffs claim.
A Xerox spokesperson declined comment on the lawsuit.
This isn’t the first time “kickbacks” to Financial Engines have been at the heart of an excessive-fee case. Fidelity Investments and Voya Financial Inc. were also targeted within the past several months for payments received from Financial Engines.
Xerox is the ninth-largest DC record keeper by assets, behind both Fidelity and Voya, which fall at No. 1 and No. 6, respectively, according to Pensions & Investments data.
Financial Engines, the largest managed-account provider to DC plans, hasn’t been a defendant in any of the three cases.
The cases come at a time when litigation in the defined contribution market has been proliferating and broadening to different corners to the market.
Plaintiffs in the Xerox case allege the record keeper is a fiduciary under the Employee Retirement Income Security Act of 1974, due to its selection of Financial Engines as the sole provider of investment advice to the Ford plans and because selection of a provider fiduciary is itself a fiduciary function.
However, Xerox’s fiduciary status could be tough to prove, according to Duane Thompson, senior policy analyst at fi360 Inc., a fiduciary consulting firm.
“I’m not sure they have a strong case in proving that Xerox is a plan fiduciary under the current definition the Department of Labor has,” Mr. Thompson said.
Currently, providers must meet criteria as part of a five-part test to be deemed an ERISA fiduciary, a definition which record keepers don’t generally meet, Mr. Thompson said.
The situation could change under the Labor Department’s fiduciary rule, which will tighten fiduciary standards in retirement accounts once implementation begins in April, he said.
The fate of that rule is in limbo, however, following on the election of Donald Trump to be the next U.S. president.