Experiential Wealth

Davis vs. Stadion Money Management, LLC + United of Omaha Life – a First Look

Feb 3, 2019 | Institutions, Regulations

This class action lawsuit shines a light onto the revenue sharing (or possible self-dealing and prohibited transactions) relationship between a recordkeeper and a managed account provider.  Although it is premature to suggest who will prevail in this suit, it is fair to suggest that the plaintiff bar is constantly seeking the next excessive fee opportunity set.  The significance of this complaint is that Stadion is a Managed Account “add-on” service provider to many other recordkeepers, and if the Court finds in favor of the Plaintiff, it could potentially increase the likelihood of such other recordkeepers with Stadion relationships being named in future complaints.

So, what would be the problem?  For starters, it is greed.  Under ERISA, greed is the antithesis of meeting the duty of loyalty and the duty of prudence.  In building a Managed Account solution, the architect should view all the components and their interrelationships from an ERISA fiduciary lens.  Even though a technology based Managed Account solution may be fairly new (since the 1990s) to the investment world, too many hands in the cookie jar has been around since the beginning of time.

This class action suit reminds us that transparency and disclosure are insufficient in meeting one’s fiduciary duty under the ERISA framework.  We need to support a solution that does not involve layers of fees among related parties. At the end, an ERISA 3(38) is a serious position and should not be considered a quid pro quo marketing tactic to win business.  The system functions because it relies on honest and participant-centric gatekeepers and referees.  Companies and individuals in charge of seeking, vetting and appointing a 3(38) discretionary portfolio manager are equally responsible as the 3(38) in making certain that, on an ongoing basis, loyalty and prudence are enforced solely in the interest of the participants.

Click here to read our full commentary on this case.