SEC Whistleblowers Say 401ks And Pensions Cheated Out Of Billions In Mutual Fund Payments

Three SEC whistleblowers say financial intermediaries serving as custodians, recordkeepers and trustees to 401ks and pensions systemically conceal and pocket billions in mutual fund “omnibus” payments which rightfully belong to retirement plans.

Over the period from May 2018 through October 2020, three separate whistleblowers have filed complaints with the Securities and Exchange Commission alleging that major financial intermediaries which provide custodial, recordkeeping, and trustee services to 401ks and pensions are short-changing their retirement plan clients.

The focus of the whistleblower complaints is the billions in so-called “omnibus” payments which mutual funds admit they pay and retirement plan intermediaries admit they receive from funds. While funds and intermediaries acknowledge omnibus payments are made pursuant to formal agreements, the parties refuse to permit retirement plan sponsors to view the agreements to determine either how the payments are calculated or the actual dollar amounts related to their specific 401ks and pensions.

Industry claims of confidentiality are especially problematic in the retirement plan context since 401k and pension sponsors have a fiduciary duty under the Employee Retirement Income Security Act of 1974 (ERISA) and other laws applicable to state and local public pensions to determine that all fees related to plan assets are “reasonable.”

Also, the mutual fund advisers are clearly considered fiduciaries under ERISA and the intermediaries may be. In essence, the mutual fund advisers and financial intermediaries to retirement plans maintain the confidentiality provisions in the agreements between them trump their fiduciary obligations to retirement plans under ERISA and other laws.

“Omnibus” payments by mutual funds, which amount to billions annually, have long been shrouded in secrecy, at best cryptically disclosed to investors. Yet they amount to a significant marketing cost which is ultimately paid by investors.

The mutual fund industry has long opposed efforts to enhance disclosure regarding fees and expenses to investors generally arguing that what investors don’t know, can’t hurt them.

These omnibus payments by mutual funds are based upon aggregate fund assets held at a particular intermediary. Aggregate assets generally include retirement plan assets. Under ERISA and other laws, compensation related to retirement plan assets rightfully belongs to the plan and should be credited to it. That’s not happening and when plan sponsors attempt to determine the amount their plans are owed, they get stonewalled.

Why should a financial intermediary entrusted with 401k assets be permitted to pocket compensation based upon the assets of the 401k? I doubt many 401k sponsors and participants feel that generous.

Here’s an example of omnibus account disclosure from UBS:

“Omnibus fees range from $10-$26 per position, are assessed per client and can vary by share class. Some fund companies may choose to calculate this rate expressed in basis points on assets, which may result in payments in excess of $26 per position. The asset managers making these payments may consider the excess of what the mutual fund would otherwise have paid for these services on a per position fee schedule as a form of revenue sharing. Exclusions may apply to positions below an asset level mutually agreed upon by UBS and the fund company, certain discretionary advisory and retirement accounts and certain funds and/or share classes. A portion of the payments we receive for omnibus processing is paid to a sub-account vendor. Your Financial Advisor does not receive a portion of this compensation.”

The billions in secret omnibus payments from mutual funds to intermediaries may detrimentally impact the investments, costs and net performance of retirement plans and investment accounts. The whistleblowers have urged the SEC and the U.S. Department of Labor to take immediate action given these industry-wide practices which undermine the integrity of the nation’s 401ks and pensions.