Why You Need to Catch and Correct Plan Deficiencies BEFORE Your Plan’s Audit.

If your plan has 100 or more participants, you’re required to have it annually audited and that audit report is required to be filed with your Form 5500 with the Department of Labor (DOL). This is not just an operational detail to be casually taken for granted. Your plan’s audit could be a prelude to, and a roadmap for, a costly DOL enforcement action and/or a potential ERISA class-action lawsuit by your plan’s participants.

Your plan’s Form 5500 and attached audit report is not private. It’s available to the public and can be accessed by literally anyone, including plan participants and class-action attorneys. It only takes one disgruntled employee or former employee, to be the representative plaintiff in a class-action lawsuit against your company (the plan sponsor) and you, personally, as a plan trustee.

In an important cautionary message on this topic, Grechen Harders, of Cohen & Buckmann, points out that: “You need to find problems before the IRS or DOL does.” And, because your audit report will be filed directly with the Department of Labor, “You need to find problems before the retirement plan’s CPA does.

She also points out just how costly the failure of plan sponsors to catch and correct their plan’s deficiencies has proven to be:

“In 2023, the DOL recovered $854.7 million from civil investigations and $444.1 million from resolving complaints. That does not even take litigation recoveries into account or consider activities of the IRS or PBGC. The bottom line is that the DOL found many violations that had not been flagged in plan CPA audits or self-corrected by plan fiduciaries, and the likely reason is that the plan fiduciaries were not doing regular self-audits of their plan operations.” (emphasis mine)

What’s the likelihood that your plan could be deficient in some meaningful way and a potential target? Ms. Harders also reports that:

“The recent statistics released by the Department of Labor (DOL) on the results of last year’s compliance activities and reviews were eye-catching. In the DOL’s recent Audit Quality Study (November 2023), the DOL found a 30% overall deficiency rate for plan audits, and a rise in deficiencies for large plans.” (emphasis mine)

As if this were not concerning enough, the rules for the CPA auditors of plans are also evolving, and you can now expect more attention to be focused on internal controls (and the lack of them) and the growing risks class-action litigation alleging fiduciary imprudence both for excess costs and chronic underperformance of investment choices within plans. The latter are now the largest of the claims being brought against plan sponsors and trustees.

OK, that’s certainly concerning. But exactly how can we (plan sponsors and trustees) “self-audit” our plans?

The short answer is that you’ll need professional help. For non-investment related operational reviews, you may need a periodic review by a qualified law firm. For additional information about and professional help with self-assessment and self-correction of plan deficiencies, see this article by Jeff Mamorsky (one of the drafters of ERISA and a partner at Cohen & Buckmann). Cohen & Buckman is a law firm providing such help and there are others to which we can refer you.

For investment choice-related issues, we believe you should have a review of the investment choices within your plan performed annually by a qualified investment advisory firm. This is one of the core services that we (Trustee Empowerment & Protection, Inc.) offer. We perform that service through use of a patented decision-assistance technology to comparatively evaluate the investment choices within your plan. We perform this analysis not just against a benchmark index but against all other available investment choices within each relevant asset class. In this way plan sponsors and trustees can better demonstrate that they are acting in the best interests of plan participants. They can also provably demonstrate that they are better performing their ERISA-required duty to exercise fiduciary oversight over the investment actions and recommendations of their plan’s investment advisor. We’re making this technology available (with training) available to other investment advisory firms and can provide you with referrals to them.

Isn’t there any way we can do that ourselves? The answer is a qualified, YES. Since chronic underperformance claims are now the largest of the claims being brought against plan sponsors and trustees, we are making this same technology – the Professional RapidReview Tool – directly available, with training, to plan sponsors and trustees.

It will enable you to independently monitor the relative performance of your plan’s investment choices, and can most effectively be used, internally, to prepare for your quarterly meeting with your plan’s investment advisor. For example, if (through use of the Tool) you see that an investment choice has progressively dropped in relative rank (compared to other available choices) or that your investment advisor is recommending a low ranked choice, you will now have a factual basis for asking: “Why is this one being recommended for retention or acquisition rather than any of the higher-ranked funds?”

This has never before been possible. Importantly, if you are a plan sponsor and/or a trustee that has always felt uneasy about having to blindly depend on the advice and recommendations of an investment advisor, whose recommendations you’ve had no way of independently verify, this is a gamechanger. It’s not only empowering, it’s giving you the tool plan sponsors and trustees have always needed to exercise fiduciary oversight in this key area – investment choice selection and ongoing performance monitoring.

Be prepared! The audit of your plan is not “optional” and that audit will directly go to the DOL and be available to the public. Ignoring the issues discussed above will not protect you . . . it’s simply not a wise or prudent strategy.

In taking the recommended protective action, you’ll find the potential improvements in investment performance, as well as the new sense of confidence and control you’ll have, is well worth the modest cost of the Tool and the training, and it can be paid for from plan assets.

For more information, please visit the Insights tab at https://TEPI.tech, or contact Eric Smith, esmith@tepi.tech.

Written by Eric Smith, J.D., President and an Investment Advisor Representative of Trustee Empowerment & Protection, Inc.,
A Registered Investment Adviser.  He is also Chairman & CEO of Decision Technologies Corporation.

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Hidden Advisor Fees: Ninth Circuit and DOL Let the Sunshine In

9th Circ. ERISA Ruling Informs DOL's New Fiduciary Proposal

Jeff Mamorsky's article provides important information that all plan sponsors, trustees, and plan counsel need to see. The fiduciary duty of plan sponsors and trustees to check / verify the compensation (direct and indirect) being paid by the plan raises this question: How can they best do so? How can they independently verify whether the necessary information is being provided by the plan's investment advisor and that it is complete, truthful, and not misleading? An independently performed, protective review might be the best way to ensure that plan sponsors and trustees can protect themselves from potential claims arising from the possible negligence of, or intentional non-compliance by, service providers. Importantly, that’s a service we can help you arrange.

Eric Smith, J.D., IA, President of Trustee Empowerment & Protection Incorporated
By Jeff Mamorsky (November 17, 2023, 5:25 PM EST)

On Nov. 3, the U.S. Department of Labor published a new set of regulatory proposals expanding the circumstances under which a person will be considered an investment advice fiduciary under the Employee Retirement Income Security Act and the Internal Revenue Code, and proposed amendments to prohibited transaction exemption, or PTE, 2020-02 that increase the reasonable compensation disclosure requirements.

In reviewing the proposed amendments, I immediately thought of the Aug. 4 decision from the U.S. Court of Appeals for the Ninth Circuit in Bugielski v. AT&T Services Inc., where participants in AT&T’s 401(k) plan sued the plan administrator, AT&T Services, and the plan’s investment committee.

The suit alleged that the defendants engaged in a prohibited transaction under ERISA Section 406(a), and breached their duty of prudence under ERISA Section 404(a), by failing to investigate and evaluate all the compensation — direct and indirect — earned by Fidelity Investments Institutional Operations Co . Inc., the plan’s record-keeper, and Brokerage Link, Fidelity’s brokerage account.[1]

The Ninth Circuit decision highlights why it is so important for financial institutions and advisers to disclose third-party compensation arrangements. It also highlights why plan sponsor fiduciaries must review such agreements to ascertain the “reasonableness” of the financial institution or financial adviser’s total direct and indirect compensation.

A determination of reasonableness is a critical component of qualifying for the ERISA Section 408(b)(2) prohibited transaction exemption, known as the “furnishing of services” exemption. In the absence of a determination of the reasonableness of total compensation, plan sponsor fiduciaries are in danger of being sued for breach of fiduciary duty for allowing the plan to enter into a prohibited transaction and the financial institution or financial adviser may be unable to engage in any transaction with the plan including the receipt of compensation.

This is now even more important in view of DOL’s recent issuance of regulatory proposals and proposed amendments to PTE 2020-02, which explicitly conditions compliance on the financial institution’s or fiduciary adviser’s total compensation — direct and indirect — being reasonable. Although the regulatory proposals and proposed amendment have not yet been finalized, this is an important issue to deal with now.

In Bugielski, the claims were prompted by amendments to AT&T’s contract with Fidelity, which gave plan participants access to mutual funds not otherwise available through Brokerage Link, Fidelity’s brokerage account platform, for a fee, and to investment advisory services through Financial Engines, a third-party adviser.

Under this arrangement, Fidelity received revenue-sharing fees from the mutual funds available to participants via the brokerage account platform; and, through its own agreement with the investment adviser, Fidelity received a portion of the fees that the investment adviser earned from managing participant accounts.

According to the Ninth Circuit’s ruling, the compensation Fidelity received from Financial Engines was significant; in some years, Fidelity received approximately half of the total fees that Financial Engines charged participants, resulting in millions of dollars in compensation for Fidelity.

The Ninth Circuit held that the “furnishing of services” exemption requires that the plan fiduciaries scrutinize and evaluate the third-party compensation arrangements between Fidelity, Brokerage Link and Financial Engines, under which Financial Engines would remit to Fidelity part of the fee paid by the plan to Financial Engines for reasonableness.

Connection Between Bugielski and PTE 2020-02

The issue highlighted in Bugielski — the obligation of sponsor fiduciaries to review the reasonableness of indirect third-party fees received by service providers — is identical to a requirement in the recently proposed DOL investment advice fiduciary regulation that explicitly conditions the availability of PTE 2020-02 on the fiduciary adviser’s compensation — direct or indirect— being reasonable.

The sponsor fiduciary’s obligation to review and monitor indirect compensation that is at the heart of Bugielski would also apply to fiduciary advisers. In addition to monitoring the reasonableness of the adviser’s indirect compensation, there are a number of other conditions in the proposal related to the impartial conduct standards that may also require review and monitoring.

Bugielski v. AT&T

The participants argued that AT&T’s amendment of its contract with Fidelity to incorporate the services of Brokerage Link and Financial Engines was a prohibited transaction under ERISA Section406(a)(1)(C), which specifically prohibits a transaction that constitutes the direct or indirect “furnishing of goods, services, or facilities” between a plan and a “party in interest.”

In the Bugielski case, service providers such as Fidelity, Brokerage Link and Financial Engines would be considered a party in interest. The participants argued that this transaction was not exempt under Section 408(b)(2), which only exempts from Section 406’s prohibition of service contracts or arrangements between a plan and a party in interest if:

The contract or arrangement is reasonable; The services are necessary for the establishment or operation of the plan; and No more than reasonable compensation is paid for the services.

For the furnishing-of-services contract arrangement to be reasonable, the party in interest must disclose to the plan’s fiduciary all direct and indirect compensation that the party expects to receive in connection with the services provided pursuant to the contract or arrangement.

The plan participants claimed that AT&T’s amendment of the contract with Fidelity to incorporate Financial Engine’s and Brokerage Link’s services did not satisfy the requirements of Section 408(b)(2) because AT&T failed to obtain the requisite disclosures of the compensation Fidelity received from these service providers and to determine that such compensation was reasonable.[2]

The plan participants also alleged that AT&T violated ERISA Section 404 and its duty to act prudently by failing to consider this compensation. Section 404 imposes a duty of prudence upon fiduciaries, requiring them to discharge their duties “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”

The U.S. District Court for the Central District of California granted summary judgment in favor of the defendants on all claims. The court held that the claims failed because the defendants had no duty to consider the compensation that Fidelity earned from the brokerage account platform or the investment adviser when evaluating Fidelity’s compensation.

On appeal, the Ninth Circuit held that the amendment of AT&T’s contract with Fidelity was a prohibited transaction for the furnishing of services between the plan and a party in interest, and therefore, could be permitted only if it satisfied the requirements for the ERISA 408(b)(2) reasonable-contract exemption.

The Ninth Circuit explained that, in its view, Congress intended ERISA’s prohibited transaction rules to be broad enough to capture even arm’s-length transactions with service providers.

In so holding, the Ninth Circuit rejected the reasoning of other circuit court decisions, which more narrowly construed the prohibition against the furnishing of services based on concerns that a broad, per se construction of the statute would hinder fiduciaries’ ability to contract with third parties for essential services.[3]

These circuit court decisions instead required that a plaintiff plead facts supporting an element of intent to benefit a party-in-interest to state a claim under the ERISA 408(b)(2) contract exemption.

The Ninth Circuit therefore concluded that the duty of prudence requires consideration of the indirect compensation Fidelity received from the brokerage account platform and the investment adviser.

The Ninth Circuit thus remanded the case to the district court to consider whether Fidelity received no more than reasonable compensation from all sources for the services it provided to the plan, and to determine whether the defendants sufficiently considered all components of the recordkeeper’s compensation to satisfy their duty of prudence.

Commentary and Analysis

All of ERISA’s prohibited transactions, including the furnishing-of-services prohibited-transaction exemption contained in ERISA Section 406(a)(1)(C), occur when there is a direct or indirect transaction between the plan and party in interest, which includes plan service providers.

The drafters of ERISA included the phrase “direct or indirect” on purpose to avoid employer plan sponsor and service provider abuse, which is the primary objective of ERISA. I was present during the ERISA drafting process and recall that it was the drafters’ intent that a prohibited transaction is an automatic, per se violation that does not require pleading facts to support an element of intent to benefit a party in interest.

The Ninth Circuit agreed, emphasizing that the prohibition against transactions between plans and parties in interest is per se in nature and that a violation does not depend on whether any harm results from the transaction. Specifically, the Ninth Circuit pointed out that it previously recognized the broad scope of Section 406, explaining that Section 406 creates “a broad per se prohibition of transactions ERISA implicitly defines as not arm’s-length.[4]

PTE 2020-02

The recent proposed amendments to PTE 2020-02 requiring that the fiduciary adviser’s compensation— direct or indirect — be reasonable, and adding a plan sponsor fiduciary obligation to review and monitor indirect compensation, is at the heart of Bugielski.

These requirements are contained in the PTE’s impartial conduct standards, which require financial institutions and investment professionals to provide advice that is in the best interest of the retirement investor, receive only reasonable compensation, and avoid making statements about the recommended transaction and other relevant matters that are materially misleading.

The proposed amendments to PTE 2020-02 would largely maintain the exemption’s impartial conduct standards in their current form. However, the DOL is proposing to amend the requirement that fiduciaries avoid making materially misleading statements.

The change would explicitly prohibit financial institutions and investment professionals from omitting information that is needed to prevent such statements from being, under the circumstances, not misleading. The amendments would also clarify that the requirement applies to both written and oral statements.

New Disclosure Requirements

Currently, PTE 2020-02 requires that financial institutions provide certain disclosures to retirement investors prior to engaging in a recommended transaction. The proposed amendments to PTE 2020-02 would increase the disclosure requirements in the following respects.

Acknowledgment of Fiduciary Status

PTE 2020-02 currently requires that the investment professional and its supervisory financial institution provide a written acknowledgment that they are fiduciaries under ERISA with respect to fiduciary investment advice provided to the retirement investor.

The DOL now proposes to also require a statement that the investment professional and financial institution are providing fiduciary investment advice. In the preamble to the proposed amendments, the DOL emphasizes that a conditional acknowledgment that an investment professional or financial institution may be fiduciaries would not be sufficient to meet this requirement.

Statement of Best Interest Standard of Care

The proposed changes to PTE 2020-02 would include a new requirement that financial institutions provide retirement investors with a statement of PTE 2020-02 ‘s best interest standard of care.

Description of Services to Be Provided and Material Conflicts of Interests

PTE 2020-02 currently requires financial institutions to provide a written description that is not misleading of the financial institution’s and investment professional’s services and material conflicts of interest. The DOL’s proposed changes would clarify that this requirement would be violated if the description is misleading in any respect.

Further, the proposed amendments would require the financial institution to disclose whether the retirement investor will pay for services directly or indirectly, including through third-party payments, defined to include gross dealer concessions; revenue sharing payments; 12b-1 fees; distribution, solicitation or referral fees; volume-based fees; fees for seminars and educational programs; and any other compensation, consideration or financial benefit paid by a third party to a financial institution; and the retirement investor will pay through commissions or transaction-based payments.

What to Do

As a result of the Ninth Circuit decision, plan fiduciaries must review for reasonableness payments to service providers under third-party arrangements.

In particular, plan sponsors need to investigate and evaluate all compensation earned by their plan record-keepers and determine whether they are receiving indirect compensation from third parties and, if they are, determine what action needs to be taken.

Also, financial institutions and investment advice fiduciaries should carefully review the recently issued DOL investment advice regulatory proposals and the proposed amendments to PTE 2020-02 to make sure they are in compliance.

If not, they run the risk of committing a prohibited transaction under ERISA 406(a) since they are a party in interest providing services to the plan, and in the absence of compliance with the 408(b)(2) exemption and PTE 2020-02, are unable to engage in any transaction with the plan including the receipt of compensation.

It is therefore of critical importance that financial institutions and investment advice fiduciaries comply with the prohibited transaction exemptions and the PTE 20200-02 proposed amendments.

The proposed changes increase the disclosure requirements, making it so that that they cannot be misleading in any respect, including the required disclosure concerning whether the retirement investor is paying for services directly or indirectly through third-party payments, such as dealer concessions, revenue-sharing payments, 12b-1 and volume-based fees.

This is an important issue to deal with now, even if the regulations and changes to the PTE have not yet been finalized as proposed.

Jeff Mamorsky is a partner at Cohen & Buckmann PC

The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Bugielski v. AT&T (76 F.4th 894)

[2] 29 C.F.R. § 2550.408b-2(a)

[3] Sweda v. University of Pennsylvania, 923 F.3d 320 (3d Cir. 2019) and Albert v. Oshkosh Corp. , 47  F.4th 570 (7th Cir. 2022)

[4] M & R Inv. Co. v. Fitzsimmons, 685 F.2d 283, 287 (9th Cir. 1982)

The original article can be found here.

Eric Smith, J.D. is President and an Investment Advisor Representative of Trustee Empowerment & Protection, Inc.,
A Registered Investment Adviser.  He is also Chairman & CEO of Decision Technologies Corporation.

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$125M Warning to All 401(k) Plan Sponsors, Trustees, and Advisors.

This massive $125 million class-action lawsuit and DOL settlement against a 401(k) plan sponsor, its trustees, and its investment advisors is a warning to all plan sponsors, trustees, and advisors.

In an alarming trend, companies offering 401(k) plans (plan sponsors), their appointed trustees, and their plan advisors, are finding themselves blindsided by class action lawsuits. The lawsuits allege that they’ve failed in their fiduciary duties towards the plan participants. 

A significant number of these lawsuits are zeroing in on the investment decisions made, or not made, by the trustees. The financial implications of such lawsuits can be massive.

The term “blindsided” is apt since these plan sponsors and trustees are often uninformed about the rapidly increasing number of such cases (over 200 in the past two years alone). Most appear entirely unaware of the risks they’re exposed to and the measures they could adopt to safeguard themselves and their companies from these legal claims.

So, how can trustees and companies defend themselves against risks of which they are largely unaware? This article aims to address this critical information gap and propose some preventative steps that merit serious consideration. In the face of rising litigation, understanding these risks and taking proactive measures could mean the difference between financial security and potential financial and reputational ruin.

The recent case and settlement, featured in the 401(k) Specialist online magazine, has sent shockwaves through the industry. This professional publication, written for and read by those who serve 401(k) plans, highlights the stark realities that employers and trustees of 401(k) plans face.

As an employer or trustee, you likely do not consider yourself a “401(k) Specialist”, nor do you likely receive or regularly read this publication. 

That’s where we come in. Our mission at Trustee Empowerment & Protection, Inc. is to bridge this information gap and arm you with the knowledge needed to understand and better protect yourself from the risks associated with your fiduciary position.

This case spotlights genuine hazards often not discussed with you by your advisors, or casually dismissed as “unlikely to happen” to you and your plan. Let’s begin with this one.

Did the company or any of its plan trustees ever imagine that they would be sued and face such a massive potential corporate and personal liability?  If you are a trustee, you need to understand that such liability is unlimited . . . it’s to the full extent of your personal net worth. 

That answer would almost certainly be “NO.”  If they were aware – if they believed their risk of being sued was real – they might have taken protective actions to reduce their chances of being sued.

In the past two years alone, there have been over 200 similar class-action lawsuits against plan sponsors and trustees. Many, if not most, of these cases allege breaches of fiduciary duties in the investment-related decisions made by plan trustees. 

Were these facts communicated and explained to them by their advisors? Likely not.

As a C-suite decision maker of a plan sponsor company, or as a trustee, have these facts ever been disclosed and discussed with you?

As a plan trustee, consider these questions:

  • Would $125 million exceed the limit of your plan’s fiduciary liability insurance policy?
  • Would $125 million exceed the combined net worth of all your plan’s trustees?
  • How would you explain to your family that you’ve been personally sued for an amount exceeding your entire life’s savings and the allegations made against you?

A typical response is: “Well, we have fiduciary liability insurance to cover all of that.” Beyond the question of whether the coverage is sufficient (it may not be), is this. Your fiduciary liability policy (assuming you have one), does not cover the reputational damage you and your fellow trustees will suffer from being publicly accused of being a “bad fiduciary”. 

And then there’s the negative impact on your family as they grapple with inquiries about the fact that you’ve been sued. For many, if not most companies and individual trustees, they rightly consider their reputations to be their most valuable assets, more valuable than the money involved in these claims. Fiduciary liability insurance policies offer no protection against or compensation for any of this.

Here are some other crucial points of which you may be unaware:

In addition to the class-action lawsuit, the Department of Labor (“DOL”) also got directly involved. Unlike law firms that weigh cost-benefit ratios, the DOL isn’t resource constrained and can independently proceed against plan sponsors and trustees (i.e., you) on all ERISA (Employee Retirement Income Security Act) claims.

It only takes one disgruntled employee or ex-employee to represent all employee plan participants in an ERISA class-action lawsuit. With large employee bases, finding a disgruntled employee isn’t difficult. 

It’s important to note that the DOL doesn’t need a disgruntled employee to directly proceed against the company or you.

Delegating all investment decision-making to their investment advisor didn’t protect the company and trustees in this case. Trustees often mistakenly believe that such delegation is an effective defense. It’s not. Have your advisors explained that you?

Further, even if investment-related decision making is entirely delegated to your plan’s investment advisor, trustees (you) still have a duty to monitor the activities and performance of your investment advisor in that role. 

In this case, the DOL found that the company and individual defendants failed to monitor the investment manager’s activities properly. When delegating responsibility to their investment advisor, was the need to do so, and how to appropriately do so, ever adequately explained to them?

This case underscores the importance of awareness of the risks involved in your role as a trustee and of the need for proactive, protective measures to help in mitigating such risks. As a trustee, you need to take all of this seriously. None of the trustees that have individually been sued in this rising wave of class-action lawsuits likely ever believed that they would be sued.

While the rising tide of class-action lawsuits really is a growing and disturbing dark cloud, is there any silver lining in any of this? Absolutely. The first step towards self-protection is awareness. Now that you’re cognizant of these challenges, you’re in a significantly better position to take steps to safeguard yourself and your company against such claims. 

But how?  What steps can you take?

While it’s impossible to retroactively alter past investment decisions, armed with this newfound knowledge, you can proactively shape future decisions to better defend and enhance both your position and that of your company.

The first course of action is further educating yourself. We recommend exploring the resources available at Trustee Empowerment & Protection, Inc. (“TEPI”). A deeper dive into this material will reveal that merely relying on the advice of a single investment advisor doesn’t provide a complete defense against claims of fiduciary imprudence. 

As a trustee, you must have some means to ensure that your reliance on the advice of your investment advisor is reasonably justified. You must also (as is illustrated in this case) have a way to effectively “monitor” your investment advisor’s activities and investment results.  How can this be accomplished?

We propose two strategies, both underpinned by our patented decision-assistance technology:
First is the use of the newly available Professional RapidReview Tool℠ (ProRRT℠). This tool, initially designed for professional investment advisors, is now available to plan sponsors, trustees, administrators, and staff via TEPI. 

The ProRRT℠ enables you to objectively score and rank the investment choices within your plan against other available choice options within any covered asset class. Utilizing up to 48 performance parameters, you can identify those choices aligning best with your plan participants’ desired investment outcomes.

This process takes mere moments and the results can be of tremendous help during quarterly meetings with your investment advisor to ensure that underperforming options are identified and not allowed to remain in your plan (increasing your risks) for far too long. 

Given the fact that claims of chronic underperformance are now some of the largest of the claims being brought against plan sponsors and trustees, this is a critical step.

ProRRT℠ is affordable (less than $10,000), and its cost can be covered by the plan itself. It comes with training and professional consulting assistance to maximize its benefits. 

Using this tool to rid your plan of chronic underperformers should not only provide enhanced protection against fiduciary imprudence claims related to your investment decisions, it can often significantly improve investment results for all plan participants

You can also secure an Investment Choice Protective Review℠ (iCPR℠). This independent review is conducted by an investment advisory firm licensed and trained in using ProRRT℠ technology for comparative evaluations of 401(k) plan investment choices. TEPI serves as a conduit, connecting plan sponsors and trustees with these specialized advisors. 

Please understand that this service isn’t intended to replace your current investment advisor; instead, it offers a valuable, independent second opinion of the suitability of the investment choices offered within your plan. In situations in which your investment-related decision-making is questioned, such a second opinion can be extremely valuable.

These solutions are new, so it’s possible that your advisors are not yet aware of them. We urge you to share this information, as these strategies can also help protect them. With these protective measures in place, you can more confidently and safely perform your important role as a plan trustee.

Written by Eric Smith, J.D., President and an Investment Advisor Representative of Trustee Empowerment & Protection, Inc.,
A Registered Investment Adviser.  He is also Chairman & CEO of Decision Technologies Corporation.

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Lawsuits against three Chicago heavyweights spotlight defunct Northern Trust funds

Walgreens, Allstate and Northern itself are accused of making poor-performing Northern investment options a centerpiece of their employees’ retirement plans.

Crain’s Chicago Business

 August 25, 2022 05:20 PM

In our opinion at TEPI, it is uniquely interesting when a company’s own employees sue it for using their own funds in their own employees’ retirement plan.  What message does that send to that company’s clients to whom they are marketing those same funds (Northern Trust’s, in this case)?  This has also happened with The Principal, one of the biggest providers of 401(k) plans in the U.S. 

Reputational damage to the plan sponsor company and to individual plan trustees?  Certainly . . . and there is no insurance to cover this reputational damage (the plan sponsor’s fiduciary liability insurance policy doesn’t cover this). 

Here are some interesting questions to answer: 

  1. If you are a trustee of a 401(k) with the very same Northern Trust funds in your investment choice lineup, what does this mean / of what significance, if any, is the fact that Northern Trust’s own employees have sued it for including such funds in their own investment choice lineup? 
  2. Is there any heightened risk or cause for concern that your company’s employees might do the same (for the same reasons)?
  3. Are attorneys representing plan sponsors and trustees (of plans with the same Northern trust funds in their lineups) letting their clients know that actions like this are being filed?  Should they?
  4. Are pro-active, protective strategies possible for them and their clients to implement?

These are not simply “rhetorical questions.”  They are questions much better asked and answered before an action is filed.

The Crain’s Chicago Business article…

Lawsuits against three Chicago heavyweights spotlight defunct Northern Trust funds

Walgreens, Allstate and Northern itself are accused of making poor-performing Northern investment options a centerpiece of their employees’ retirement plans.

written by Steve Daniel

A series of mutual funds launched in 2010 by Northern Trust and discontinued last year, has ensnared three of Chicago’s largest publicly traded companies, including Northern itself in litigation over inclusion of the funds in company sponsored retirement plans.

Read the Full Article Here…

Written by Eric Smith, J.D., President and an Investment Advisor Representative of Trustee Empowerment & Protection, Inc.,
A Registered Investment Adviser.  He is also Chairman & CEO of Decision Technologies Corporation.

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NEWLY FILED SUITS NOW TAKE AIM AT TARGET DATE FUNDS AND LOWEST COST CHOICES IN 401(K) PLANS – WHAT ARE PLAN TRUSTEES TO DO NOW?

If you’re a sponsor or trustee of a 401(k), 403(b), 457, or other defined contribution plan, you might believe that the use of “target date retirement funds” (TDFs) shields you from potential class-action lawsuits alleging a breach of fiduciary duty. You may also think that opting for the lowest cost providers would further safeguard you against such accusations. Unfortunately, these assumptions could lead you down a precarious path.
 

Recently, ThinkAdvisor reported a surge of lawsuits against companies like Citigroup and Genworth Financial, among others, due to the underperformance of their BlackRock TDFs. This highlights an often overlooked tension between cost and performance: “Citigroup, Genworth Face Lawsuits Over BlackRock TDFs in Their 401(k)s”, Melanie Waddell reports that:

“Citigroup and Genworth Financial are among at least six firms that are facing class-action lawsuits filed since Friday over “underperforming” target date funds from BlackRock. . . .”

Earlier class-action lawsuits against plan sponsors and trustees primarily centered around excessive cost-related claims, which were relatively straightforward to prove. However, these excess cost-related claims tend to be marginal compared to the potential damage from chronic underperformance claims, which can accumulate significantly over time.

As legal firms become more aware of this discrepancy, they are shifting their focus towards alleged chronic underperformance as a violation of fiduciary duties. Consequently, plan sponsors, trustees, and their advisors who have been emphasizing lower-cost choices as a protective measure may find themselves in hot water.
The class-action suits argue that the BlackRock TDFs underperformed compared to many alternative mutual funds. The lawsuits stress that any objective evaluation of the BlackRock TDFs would have led to the selection of better-performing options. Instead, defendants are accused of chasing low fees without considering return on investment.

This brings us to an essential point: cost and performance should not be considered in isolation; they must be evaluated in tandem. The process of “weighing” these factors is critical, although the specifics of this process and the definition of “performance” remain undefined.

At Decision Technologies Corporation (DTC), we’ve spent decades addressing these issues. Our newly released Professional RapidReview ToolTM / our “ProRRTTM” allows for a comprehensive evaluation of up to 48 different performance parameters, including costs. This tool enables plan trustees to objectively score and rank thousands of choices, identifying those best at producing the desired composite performance over time.
By using this selection and ongoing performance monitoring process, plan trustees can demonstrate that they have fulfilled their fiduciary duty and acted in the best interests of their plan’s participants.

If you’re a trustee of a defined contribution plan, we encourage you to visit our Trustee Empowerment & Protection, Inc. website, which refers plan sponsors and trustees to investment advisors trained to perform protective reviews of your plan’s investment options. Understanding and mitigating your risks, including personal liability, is crucial.

And if you’re an investment advisor, we invite you to learn how DTC’s patented decision-assistance technology can enhance the investment recommendations you offer to your clients. Visit our Trustee Empowerment & Protection, Inc. website to learn how you can qualify to provide these protective reviews, expanding your advisory business while serving a vital role.

Written by Eric Smith, J.D., President and an Investment Advisor Representative of Trustee Empowerment & Protection, Inc.,
A Registered Investment Adviser.  He is also Chairman & CEO of Decision Technologies Corporation.

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Plan Fiduciaries Prevail In First Published Appellate Opinion Applying Supreme Court’s ERISA Ruling In Hughes v. Northwestern

Troy, MI – June 29, 2022 – On June 22nd, the 6th Circuit Court of Appeals handed down Smith v. CommonSpirit Health, et al., dismissing a class-action complaint alleging (in part) fiduciary imprudence by the 401(k) Plan’s trustees for having poorer performing actively managed investment choices rather than lower cost (and apparently better performing) passive choices. 

 

We don’t disagree with the result.  Just the fact that a Plan has actively managed choices which are under-performing passively managed choices alone is probably not enough.  But, the Court did not take the position that chronic under-performance was somehow OK?  Here are a couple of key quotes from the Opinion:

  • “We accept that pointing to an alternative course of action, say another fund the plan might have invested in, will often be necessary to show a fund acted imprudently (and to prove damages). But that factual allegation is not by itself sufficient. . . . these claims require evidence that an investment was imprudent from the moment the administrator selected it, that the investment became imprudent over time (emphasis added), or that the investment was otherwise clearly unsuitable for the goals of the fund based on ongoing performance.” No. 21-5964 Smith v. CommonSpirit Health, et al. Pages 7-8
  • “That a fund’s underperformance, as compared to a “meaningful benchmark,” may offer a building block for a claim of imprudence is one thing. Meiners, 898 F.3d at 822. But it is quite another to say that it suffices alone, especially if the different performance rates between the funds may be explained by a “different investment strategy.” Id. at 822–23. A side-by-side comparison of how two funds performed (emphasis added) in a narrow window of time, with no consideration of their distinct objectives, will not tell a fiduciary which is the more prudent long-term investment option. A retirement plan acts wisely, not imprudently, when it offers distinct funds to deal with different objectives for different investors.”  Id., Page 9.

It appears clear, that deteriorating performance overtime – holding chronically under-performing choices – can lead to a valid claim of fiduciary imprudence, when the comparison is “apples to apples” – i.e., when actively managed funds, with the same investment goals, are compared.  This is precisely what TEPI’s iCPR(TM) is designed to do.

However, our Goal is to help prevent plan trustees and trustees from getting sued in the first place . . . because even if a plan sponsor and trustees “win,” as they did this case, they “lose.” Why?

How much did defending the case up to the 6th Circuit Court of Appeals cost?  What as the plan sponsor’s deductible (“retention”) in their fiduciary liability insurance policy (assuming they likely have one).  And, what reputational damage (for which there is no insurance coverage) has been done to both the plan sponsor and individual trustees?  That damage extends to family members as well, who have to face comments and inquiries about publicly made allegations that a spouse and/or parent has breached their fiduciary duty . . . has been a “bad” trustee.  Unfortunately, these 2nd and 3rd order, collateral effects are seldom thought through by plan sponsors, trustees, and those advising them.

Reputation matters . . . and, in many cases / to many persons and companies, it matters more than the money.

TEPI is working not just to help plan sponsors and trustees “win” such cases, but to prevent the filing of such cases and to simultaneously improve the investment results and retirement security of the plan’s participants.

Written by Eric Smith, J.D., President and an Investment Advisor Representative of Trustee Empowerment & Protection, Inc.,
A Registered Investment Adviser.  He is also Chairman & CEO of Decision Technologies Corporation.

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NASAA Receives DTC’s Response to SEC RFI Describing Its Patented RegTech/WealthTech Decision Assistance Technology That Could Support Tougher Rules​

NASAA Receives DTC’s Response to SEC RFI Describing Its Patented RegTech/WealthTech Decision Assistance Technology That Could Support Tougher Rules

FOR IMMEDIATE RELEASE: Troy, MI – December 2, 2021 – As States consider adopting their own, potentially more rigorous “fiduciary” and “best interest”-type rules and  regulations, Decision Technologies Corporation (DTC) has announced that it has provided the North American Securities Administrators Association (“NASAA”) with a complete copy of its recent informational filing with the SEC describing its newly launched ProRapidReview Tool (“ProRRT”) – the first-of-its-kind RegTech/WealthTech application of its patented decision-assistance technology.

DTC’s ProRRT enables investment advisors and securities brokers to select multiple performance parameters and hierarchically arrange and weight them, profiling the ideal “investment effect” desired within any covered asset class. Using this composite blend of weighted performance factors, users can objectively score and rank hundreds of choices, identifying which mutual funds and ETFs have been the best at producing the composite investment results they and their investor clients are seeking over time, and they can do this in mere moments.

“After more than a decade of in-house testing and use with advisors and individual investors,” says Eric Smith, the Chairman & CEO of DTC, “we believe that in making it more broadly available, this technology will ultimately change the way investment selection is performed and that this submission could ultimately affect what the SEC and various state regulators view as regulatorily possible and reasonable.” 

Smith believes: “The combined RegTech and WealthTech effects of this technology, could prove to be a ‘game changer,’ especially in helping securities brokers and investment advisors stay ahead of evolving new regulations through improving transparency, filtering out conflicts of interest, and enhancing chances of improving investment results.  It should also provide a meaningful competitive edge to early adopters, who can use it show the historic investment results prospective clients have been getting versus what they could be getting with the help of this newly available technology.” 

DTC is the creator of the cutting-edge, patented decision-assistance technology which enables users of data, in a broad range of applications, to score and rank thousands of choices in a manner specific to individual needs, goals, and preferences by applying user-specified weighted blends of performance and other characteristics. Its decision engines are designed to address a growing challenge faced by people in in both their businesses and personal lives – the often-paralyzing complexity of decision making in a world of too many choices and too much information about them. DTC’s technology empowers users to optimize their choices in an objective way, cutting through market “noise”, filtering out conflicts of interest, and increasing probabilities of future success through facilitating better choices.

For more information contact:

Jack Findley, COO

 jack@decisionengines.tech

+1 947-282-2901

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DTC Responds to SEC RFI With Notice of New RegTech/WealthTech Offering ​

Its game changing technology may effect what the SEC views as possible and reasonable in its evolving review of RegBI requirements.

FOR IMMEDIATE RELEASE: Troy, MI – November 11, 2021 – Decision Technologies Corporation (DTC) has announced that it has responded to the SEC’s recently issued RFI regarding use of technology to develop and provide investment-advice, SEC RFI – FILE NO. S7-10-21, with a description of its newly launched ProRapidReview Tool (“ProRRT”), the first-of-its-kind RegTech/WealthTech application of its patented decision-assistance technology.

DTC’s ProRRT enables investment advisors and securities brokers to select multiple performance parameters and hierarchically arrange and weight them, profiling the ideal “investment effect” desired within any covered asset class. Using this composite blend of weighted performance factors, advisors and brokers can rapidly and objectively score and rank hundreds of choices, identifying which mutual funds and ETFs have been the best at producing the composite investment results they and their investor clients are seeking over time.

“After more than a decade of in-house testing and use with advisors and individual investors,” says Eric Smith, the Chairman & CEO of DTC, “we believe that in making it more broadly available, this technology will ultimately change the way investment selection is performed. This submission could ultimately affect what the SEC and other regulators view as regulatorily possible and reasonable.” 

Smith believes that “the combined RegTech and WealthTech effects of this technology could prove to be a ‘game changer,’ especially in helping users stay ahead of evolving new regulations and in conferring a meaningful competitive edge to early adopters through improving transparency, filtering out conflicts of interest, and enhancing chances of improving investment results.”

Read DTC’s response to the SEC’s RFI here.

DTC is the creator of the cutting-edge, patented decision-assistance technology which enables users of data, in a broad range of applications, to score and rank thousands of choices in a manner specific to individual needs, goals, and preferences by applying user-specified weighted blends of performance and other characteristics. Its decision engines are designed to address a growing challenge faced by people in in both their businesses and personal lives – the often-paralyzing complexity of decision making in a world of too many choices and too much information about them. DTC’s technology empowers users to optimize their choices in an objective way, cutting through market “noise”, filtering out conflicts of interest, and increasing probabilities of future success through facilitating better choices.

For more information contact:

Jack Findley, COO

 jack@decisionengines.tech

+1 947-282-2901

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DTC Introduces Revolutionary Mutual Fund and ETF Ranking Tool for Investment Advisors.

DTC Introduces Revolutionary Mutual Fund and ETF Ranking Tool for Investment Advisors.

FOR IMMEDIATE RELEASE: TROY, Mich., Nov. 4, 2021 — Decision Technologies Corporation (DTC) has announced its launch of a first-of-its-kind WealthTech/RegTech application of its patented decision-assistance technology that is designed to give investment advisors the ability to rapidly compare mutual funds and ETFs against all other available choices in ways never before possible.

It’s new ProRapidReview tool (“ProRRT”) enables users to select performance parameters and hierarchically arrange and weight them, profiling the ideal “investment effect” desired within any covered asset class. Using this composite blend of weighted performance factors, the ProRRT scores and ranks hundreds of choices in a way that objectively identifies which mutual funds and ETFs have been the best at producing the composite investment results users are seeking over time.

“In an industry where there is too much information and too many choices, investment advisors and their clients can truly benefit from a new, more effective way to evaluate which mutual funds and ETFs to choose and recommend,” said Eric Smith, CEO of Decision Technologies Corporation.

“The ProRapidReview is the only tool specifically designed to increase client recruitment, AUM, and new revenue,” he continued. “Advisors can use the tool to quickly show prospective clients the often-significant performance gaps between the mutual funds and ETFs they are holding and qualified alternatives. Because prospective clients will have never seen anything like this, much less been able to participate in how the scoring and ranking is performed, the effect is often dramatic as is the resulting competitive advantage for the advisor.”

It also helps advisors to ensure compliance with evolving federal and state “fiduciary” and “best interest” regulations by enabling advisors to provably demonstrate that their mutual fund and ETF recommendations truly meet their clients’ investment objectives and are in their clients’ best interests, by a process that filters out all conflicts of interest, both known and unknowable.

The ProRapidReview increases efficiency by dramatically reducing the time involved in investment selection and qualitative due diligence by focusing advisors’ attention on the top three to five choices rather than tens or hundreds or even thousands of available choices.

DTC is the creator of the cutting-edge, patented decision-assistance technology which enables users of data, in a broad range of applications, to score and rank thousands of choices in a manner specific to individual needs, goals, and preferences by applying user-specified weighted blends of performance and other characteristics. Its decision engines are designed to address a growing challenge faced by people in in both their businesses and personal lives – the often-paralyzing complexity of decision making in a world of too many choices and too much information about them. DTC’s technology empowers users to optimize their choices in an objective way, cutting through market “noise,” filtering out conflicts of interest, and increasing probabilities of future success through better choices.

To learn more contact

Jack Findley
jack@decisionengines.tech
+1 947-282-2901

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DTC’S RESPONSE TO SEC RFI – FILE NO. S7-10-21 INFORMATION ON INVESTMENT ADVISER USE OF TECHNOLOGY TO DEVELOP AND PROVIDE INVESTMENT ADVICE

DTC'S RESPONSE TO SEC RFI – FILE NO. S7-10-21 INFORMATION ON INVESTMENT ADVISER USE OF TECHNOLOGY TO DEVELOP AND PROVIDE INVESTMENT ADVICE

From: Eric S. Smith, J.D., Chairman & CEO, Decision Technologies Corporation (“DTC”)

To: The Securities & Exchange Commission (“SEC”) via rule-comments@sec.gov File No. S7- 10-21 // cc: Division of Trading and Markets, Office of Chief Counsel, via tradingandmarkets@sec.gov and Division of Investment Management, Investment Adviser Regulation Office via IArules@sec.gov.

Date: October 1, 2021

Re: Information regarding a newly available decision-assistance technology, introduced and described at ProRRT.com, that enables investment advisors to score and rank investment choices in a manner specific to the needs, goals, and propreferences of individual investors, optimizing investment selection recommendations in such a way as to ensure that such recommendations are provably in the best interests of individual investor clients and that conflicts of interest, both known and unknowable, are effectively filtered out.

EXECUTIVE SUMMARY:

Ongoing federal and state regulatory efforts toward ensuring that what is being recommended and sold by securities brokers and investment advisors is in their customers’ and clients’ “best interests” continue to face industry push-back. The principal arguments against such efforts have been that:

  • there is no way to determine what is “best” for any client; there are too many choices and too much information about them; and securities brokers / FINRA additionally argue that
  • requiring FINRA-registered securities brokers to effectively become “fiduciary” advisors will prevent small investors from being served – that unless “suitable” products (as defined by FINRA) can simply be sold to them, it will not be economically feasible for securities brokerage firms to serve small investors at all.

A newly available decision-assistance technology appears to effectively address these objections and provides a way for brokers and advisors to comparatively evaluate thousands of investment choices in a manner specific to individual clients’ needs, goals, and preferences. Moreover, it does so objectively, transparently, and in a way that effectively filters out all conflicts of interest, both known and unknowable.

The technology enables investment professionals to pick any number of performance parameters (from 48 possible choices – more are being added), which can then be hierarchically arranged and weighted to profile the ideal “investment effect” desired. Utilizing that composite blend of weighted factors, the available investment choices, within any relevant asset class, can be scored and ranked. The resulting ranked list shows how the client’s investment selections objectively compare with those mutual funds and ETFs that have proven best over time at producing the desired composite performance, within the relevant asset class.

This newly available technology is now being offered to professional investment advisors and securities brokers at ProRRT.com, where detailed information about it can be reviewed.

The technology was developed with one key goal in mind – to help answer this important question: “Of all the available choices, which ones are best for my clients?”

There’s now an objective and transparent way to answer that question and provably demonstrate that what is being recommended and sold to customers / clients is in their best interests. The ability to answer that question may now help to determine what is regulatorily possible and reasonable.

DISCUSSION:

THE INVESTOR PROTECTION “PROBLEM” AND SOME UNDERLYING CAUSES.

In the continuing struggle to ensure that investors are protected from the adverse effects of:

  • Pervasive conflicts of interest;
  • Deceptive, manipulative, and/or predatory practices; and the
  • Growing number of investment choices and overwhelming amounts of information about them,

these listed issues all appear to coalesce in one simple question: “Of all the available choices, which ones are best for the client?” Strangely, there appears to be little serious interest in finding a way to for brokers and advisors (much less their clients(1)) to objectively answer that question. Why?

The debate surrounding the promulgation of the Department of Labor’s ill-fated “fiduciary rule” and the SEC’s creation of its Reg. BI, is enlightening. Both regulatory efforts faced strong pushback from the financial services industry, especially from securities brokers and FINRA.(2) Pointing to the bewildering and growing number of investment choices, they effectively argued that it is not possible to determine what is “best” for any client, and regulations should not require the impossible.

To date, that argument appears to have been both successful and virtually impossible to refute. Yet, in this “information age,” is it reasonable to believe that it has not been possible for a $90+ trillion financial services industry to develop a way to manage all of that data? Is it truly impossible to find a way to ensure that what advisors and brokers are recommending and selling to their clients is provably in their best interests? Or is there little to no interest in doing so? Would doing so simply be too disruptive of the way the financial services business has always been conducted? Unfortunately, the answers to the last two questions might well be “yes,” and one reason immediately seems obvious.

The financial services marketplace is and has been vendor-dominated since its inception. The sale of financial products is the motivating force driving it. Moreover, competition among its vendors typically involves pricing and compensation “incentives” designed to ensure the preferential recommendation and sale of one vendor’s products over those of other vendors. Until the SEC’s recent action compelling disclosure of these arrangements, these conflicts of interest were seldom voluntarily disclosed, for obvious reasons – nothing about those arrangements is good for investors.

IS REQUIRING THE DISCLOSURE OF CONFLICTS OF INTEREST THE “SOLUTION?”

We submit that the answer, unfortunately, is “NO” – that is, if the goal is to try to ensure that what is being recommended and sold to customers / clients is in their best interests. The reason is that requiring even the full disclosure of conflicts of interest will not alone be sufficient to structurally change the way the financial services marketplace works. That marketplace will still be vendor- dominated and still likely incentive-driven. One can simply perform the following though experiment to understand the concern:

  • Imagine that brokerage and investment advisory firms all scrupulously comply and begin to disclose that each, in some form or fashion, receives incentive compensation or are in other ways benefited from vendor relationships in ways that can potentially affect their investment recommendations and the universes of investment choices from which they recommend and sell. If all or virtually all disclose such conflicts, with no ready way for customers / clients to identify and move to others with no such conflicts (assuming they exist), has anything truly protective of investors really been accomplished? Or will such disclosures become “just one more ‘form’” that the broker or advisor must present and get signed by their customer / client? Will the customer / client simply believe (or perhaps be led or encouraged to believe) that such disclosures are going to be pretty much the same wherever they go and so conclude that it’s likely to be futile to inquire further . . . better to just go ahead and sign it and move on?

We submit that it is unlikely that requiring even complete conflict of interest disclosures will alone be sufficient to produce meaningful structural changes in the way the financial services industry works, nor is it likely to be sufficient to ensure a significantly more effective level of investor protection. We believe the key to achieving a desired greater level of investor protection will require a way to effectively address the large and growing number of financial products and the bewildering array of information about them. In other words, we believe the key will lie in overcoming the arguments relied upon by the financial services industry in its resistance to rules designed to ensure that what is being recommended and sold to clients is in their clients’ best interests.

Effectively addressing the overwhelmingly large and growing number of financial products and information about them is the key. It is estimated that there are now over 30,000 mutual funds and share classes and as many as 5,000 – 6,000 separate account managers in the U.S. alone. With so many choices and so much information available about them, there has been no practical way for even “experts” to be knowledgeable about, much less be able to comparatively evaluate, all of them.

Consequently, many brokerage and advisory firms simply select relatively small “approved” subsets of investment choices from which they recommend and sell. They often justify this by arguing that there is no practical way to do due diligence on so many choices. But exactly how these relatively small, proprietary universes are created is seldom disclosed. What it takes be included / to “get in” is not generally available and not verifiable by customers or clients, or even their advisors, and this too often proves to be where those wanting “in” must “pay to play.” Ultimately, a major part of the problem arises from competition among thousands of vendors, in which those with dominant market positions and much greater resources can secure competitive advantages through incentivized distribution arrangements against which smaller vendors with less resources cannot effectively compete.

Having too much information, with no practical way to use and benefit from it, is the functional equivalent of having no information at all. This has long worked to the advantage of the financial services industry.(3) Having too many choices and too much information about them, with no practical way to comparatively evaluate them, has effectively required investors at all levels (both individual and institutional) to be almost entirely dependent upon the investment recommendations of securities brokers and investment advisors.(4) As discussed above, this has also served as a justification of the financial services industry’s push-back against regulations focused on ensuring that what is recommended and sold to investors must be in the investors’ “best interests.”

The patented decision-assistance technology now being introduced fundamentally changes this. Because it is often difficult to envision what one has never experienced, seeing the technology demonstrated is indispensable in understanding its potential benefits and likely effects. We look forward to providing such demonstrations for those of the SEC’s staff reviewing this submission.

THE SEARCH FOR AN ANSWER / A WAY TO BETTER PROTECT INVESTORS.

For us, the key question – “Of all the available choices, which one is best?” – lingered, unanswered for years and ultimately resulted in an important realization – that to answer that question, three things would be needed:

  1. Universal market access to all available choices, something most believed impossible to secure;
  2. No compromising relationships with vendors of financial products and services, the accomplishment of which appeared to be simply a matter of corporate “Will”; and,
  3. A “Process” that could accomplish 3 things, also generally thought impossible to achieve:
    1. The ability to cut through all of the “noise” in the markets from the plethora of advertising and marketing materials;
    2. The ability to filter out all conflicts of interest, both known and unknowable; and, the
    3. Ability to use the vast amounts of obtainable information to comparatively evaluate all available investment choices in a manner specific to the needs, goals, and preferences of advisors and investors.

The last of the three led to the creation the patented decision-assistance technology that enables users, whether investment advisors, brokers, and (ultimately) individual investors, to comparatively evaluate literally thousands of mutual funds, ETFs, money managers and (prospectively) annuities and other financial products in a manner specific to their individual needs, goals, and preferences. The technology optimizes and objectifies investment selection in a way previously unavailable(5) to securities brokers and investment advisors and, in doing so, provides a way to definitively answer the key question posed above.

As illustrated below, the technology works by enabling users to select any number of performance parameters, which can then be hierarchically arranged and weighted, to profile the “composite investment effect” ideally desired from any asset class comprising an investor’s portfolio. The technology then enables the user to score and rank thousands of choices and to identify which of the mutual funds, ETFs, or money managers have been the best at producing the desired composite investment effect over time.

When users are not only able to see but also control the selection of, and degree of emphasis placed on, the factors important to them, transparency is assured. And, if an investor client can not only see but can also directly participate in how his or her investment advisor is comparatively evaluating choices within the universes from which the

client must choose (e.g., helping to select and weight the performance factors being used), there is no way to “game” the process, meaning actual and potential conflicts of interest are filtered out. We believe that, in this way, the goal of true investor protection could possibly be realized.

But there is another important dimension to the application of this decision-assistance technology. Much like the key question posed above regarding investment selection, we submit that there is another key question – one regarding ongoing performance monitoring and investment retention and replacement decisions. That additional question is not: “How did our mutual funds, ETFs, and/or investment managers do?” Investors get that question answered. They’re shown how much their investment choices went up or down and that is then typically compared to a “benchmark index.”

That’s typically all that’s provided. Instead, we submit that the question virtually all investors would ideally wish to have answered is this: “How did our choices do relative to all of the others we could have selected?” Much like the earlier discussed “key question,” this question appears to have also seldom (if ever) been seriously addressed, and current performance reports (at both the individual and institutional levels) typically do not enable investors to answer either of the above two questions.(6)

There is a significant difference between “absolute performance” (which is currently reported) and “relative performance” (which almost never is) and what has been missing is relative performance information – information that will enable advisors and their investor clients to answer the above two important and common sensical questions. In this “information age,” it is surprising and difficult to understand why, despite chronically poor investment results, there has been no meaningful evolution in investment performance reporting and in the information provided to investors.(7)

THIRD PARTY REVIEWS AND EVALUATIONS.

Included with this submission is an independent evaluation of the application of the decision-assistance technology within the financial services marketplace. It was performed by one of the top “Quants” on Wall Street, C. Michael Carty, former President of the NYC Chapter of QWAFAFEW (www.qwafafew.org). His conclusions are worth special attention.

It is believed that this technology represents an evolutionary step beyond the most sophisticated metrics currently used in investment consulting. Beyond the continuing use of bar charts and scatter charts in institutional investment reports, 30-40 year old “technology” that provides no actionable data, some of the most sophisticated metrics currently in use (e.g., Sharpe Ratios, Sortino Ratios, Information Ratios, etc.) are also quite old and were developed before later advances in computing power. Component parts of these metrics cannot be varied – i.e., factors cannot be added or deleted, and the degree of influence of any factor cannot be increased or decreased.

In contrast, with this newly available technology, any number of performance parameters can be selected, hierarchically arranged and weighted. With that resulting blend of weighted factors, full universes of available choices can be scored and ranked in a manner specific to the unique needs, goals, and preferences of the brokers, advisors and their clients, and this can be done in real time and in mere moments. Importantly, this process produces actionable data. Brokers, advisors, and their clients can see the investment choices that have proven best over time at producing the composite investment effects they are seeking. Attention can then be more efficiently shifted to qualitative due diligence focused on only the top performers.(8)

Additionally, the nationally prominent Wagner Law Group (https://www.wagnerlawgroup.com/) has also rendered a legal Opinion strongly supportive of the use of the decision-assistance technology, especially in helping to meet the requirements of Reg. BI, as well as the requirements of ERISA regarding the investment-related decision making of retirement plan sponsors and trustees. Included with this submission is a copy of that legal Opinion.

Although both evaluations focus principally on the protective, compliance related “RegTech” aspects of the technology, the “WealthTech” benefits should not be overlooked or minimized. As discussed above, use of this technology will likely result in improved performance for the investor. Specifically, performance gaps revealed using the technology, between choices currently in place and qualified alternatives, are often quite dramatic and (while past performance is no guarantee of future results) moving to choices demonstrating better composite performance over time can have a dramatic effect on the financial wellbeing and retirement security of investors. Simply filtering out conflicts of interest, which can too often corrupt investment recommendations and degrade investment results, should almost assuredly help to improve investment results. Any process that can effectively help to improve investment results could have powerfully beneficial and far-reaching effects.(9)

SUMMARY – IS THIS NEWLY AVAILABLE TECHNOLOGY “THE SOLUTION?”

We believe that it may be, if accepted and used.(10) From over a decade-long experience with the application of this newly available technology,(11) we are confident that it provides a unique answer to the industry’s pushback against “best interests” and “fiduciary” rules and regulations, at both the federal and state levels. How much better can one ensure (and provably demonstrate) that what is being offered to an investment customer / client is in that investor’s “best interests” than to score and rank all available choices, using hierarchically arranged and weighted blends of performance factors specifically selected to match that investment customer’s / client’s needs, goals, and preferences, especially when the process, factors, and weightings are transparently visible to the customer / client who can also directly provide their input? Importantly, since the application of this technology can effectively filter out all conflicts of interest (both known and unknowable), it appears to provide a solution that not only achieves conflict of interest-related regulatory goals but appears to go beyond what has likely been believed to be possible. Consequently, we believe this is a technology of which the SEC should be aware and one deserving of consideration.(12)

 

Endnotes:

(1) For individual investors, the question is nearly identical: “Of all the available choices, which ones are best for me?”

(2) The brokerage community / FINRA also argue that requiring brokers to effectively become “fiduciary” advisors will prevent small investors from being served. Because “advising” clients is more time consuming and necessitates higher total fees than smaller investors can easily afford, they argue that, unless “suitable” products can simply be sold to them, it will not be economically feasible for small investors to be served at all. That appears to assume that small investors are somehow benefited from the ability of the brokerage industry to sell them what securities brokers and FINRA unilaterally determine to be “suitable,” as in “trust me, this is ‘suitable’ for you.” However, increasing regulatory focus on this issue appears to suggest that, in actual practice, this “standard” has not been sufficient to protect the investing public, especially not small investors.

(3) One real, though less obvious, benefit is that it effectively operates to help prevent investment products from becoming “commoditized” – a result feared by financial product vendors. If brokers and advisors could quickly and easily comparatively evaluate financial products, it could effectively “commoditize” them. Large and better-known mutual fund companies especially consider this to be a very serious threat, and something to be prevented.

(4) As perceived “experts,” with greater access to information and superior product knowledge, their recommendations are almost universally accepted and relied upon. Both institutional and individual investors have virtually no meaningful ways to independently “vet” the investment information and recommendations they are given.

For trustees of 401(k), 403(b) and other defined contribution plans, this could soon become a crisis, as the result of a dramatic increase in class-action lawsuits against both the sponsors and trustees of such plans. The defense often offered by plan trustees, that “we relied on the advice of our investment consultant,” cannot be relied upon. A federal court has ruled that relying on the advice of an investment consultant was not a complete defense to a charge of fiduciary imprudence

. . . that, at the very least, the trustees must have some way to ensure that their reliance on the advice of their investment consultant is reasonably justified. See the line of cases, culminating in the unanimous U.S. Supreme Court decision in Tibble v. Edison, 135 S.Ct. 1823, 1825 (2015) – decision in favor of the plaintiffs (the participants in Edison’s 401k plan).

(5 )The granting of a U.S. Patent covering this technology, and advisory process that is supported by it, is prima facie evidence that there was nothing similar available within the U.S. financial services marketplace. When patent applications are filed, a “prior art” search is conducted and, if something similar is found, a patent is not issued because the invention has failed the “uniqueness” test.

(6) Even though the investment reports of institutional investment consultants typically contain a vast of amount of statistical and other data concerning the fund’s investments and investment results, the information they provide is too often not actionable and is seldom sufficient to help prevent pervasive chronic underperformance. Their investors clients can certainly conclude that they are not happy with their performance, but that is all. They typically cannot tell, from their investment reports, which investment choices have been performing better than theirs, much less which have been best at producing the composite investment results that would most closely match their needs, goals, and preferences over time.

(7) Regarding this, one prominent (now retired) CFO of a major city, when shown this newly available decision-assistance technology, stated: “I was around when bar charts and scatter charts were introduced into institutional performance reporting, some 30+ years ago. Since then, I’ve never seen any evolution the way performance reporting has been done, until now. I had almost given up hope of ever seeing any improvement.”

(8 )This is important, because this provides a meaningful counterargument to the industry’s objection (to stronger “best interest” rules) that “there’s no way any company, no matter how large, can do qualitative due diligence on so many choices.” With is process, qualitative due diligence (which will always be necessary) can be focused on only the top 3-5 choices. Why would one perform qualitative due diligence on number 176, for instance, if there is no interest (from a composite performance point of view) in picking that choice? This technology will help produce much greater efficiencies in investment choice selection and ongoing performance monitoring.

(9) For example, chronic underfunding of public pension plans is becoming an existential threat to far too many cities, counties, and states. Rather than a remedy to underfunding, chronically subpar investment performance too often proves to be an aggravating factor, making chronic underfunding worse. Clearly, for such chronically underfunded and underperforming plans, whatever process is being used for active investment manager selection and ongoing performance monitoring has not been working well and hasn’t been for some time.

(10) Whether or not it will be adopted and used, and at what rate, by FINRA-registered brokers and SEC-regulated investment advisors is presently unknown. Securities brokers and investment advisors effectively enjoy a “monopoly:” on information relating to investment choices. As such, we’ve found that some feel that they don’t need this technological capability. Because their clients simply accept their recommendations, some appear to feel that they don’t need to try to determine what’s objectively “best” for their clients. On the other hand, in a financial services marketplace in which everyone appears to be doing the same things in largely the same ways, we believe this technology could offer significant competitive advantages, especially to early adopters. We believe it could both increase their revenue and help them recruit clients away from competitors. This important “WealthTech” effect makes it possible for prospective clients to be shown, in minutes, an answer to this key question: “How did my choices do in comparison with all of the others I could have selected?” When the answer reveals that the top scoring funds produced average returns hundreds of basis points higher per year over the last 5 years than theirs, for instance, often with less volatility (i.e., no equivalent risk premium for that large return premium), the “recruitment” of that client away from a competitor may be easy to envision. If that begins to occur, the adoption of this decision technology may accelerate and, with that growth, we believe a beneficial transformation of the financial services marketplace could result, with or without additional regulatory action.

(11) The decision-assistance technology was developed, tested, and practically applied within an SEC registered investment advisory firm for nearly a decade before it was transferred, to Decision Technologies Corporation to facilitate its further development and distribution – to make available within the brokerage and investment advisory communities.

(12) The fact that similar (though non-identical), overlapping rules by the SEC, DOL, and various states (e.g., NY, NJ, MD, NV, and likely others) are now being considered and adopted simply heightens the perceived need for a single process that can help to ensure compliance with them all.

Eric Smith, J.D. is President and an Investment Advisor Representative of Trustee Empowerment & Protection, Inc.,
A Registered Investment Adviser.  He is also Chairman & CEO of Decision Technologies Corporation.

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