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Another Proprietary Fund Lawsuit: What does independent even mean?




Lowe's famous tagline is "Do it right for less". In the case of their 401K plan, a judge found Aon didn’t violate ERISA when encouraging Lowe’s to change the plan’s investment menu or by selecting and maintaining a proprietary fund for the plan that underperformed. They had a consistent process for evaluating the funds.


Lowe's however settled with the plaintiff's for $12.5 million. Specifically mentioned was the AON Growth Fund. It had little performance history, it was in the bottom 10% of it's peers for all time periods, it was only included in two other retirement plans in the country and was not included in any similar-sized retirement plans. So why would AON recommend their own proprietary fund over a number of well suited alternatives? (kidding, I think it's pretty easy to deduce why).


The key for Plan Sponsors as new alternatives are recommended by their advisor/consultant/vendor is to ask a simple question, "Would you make more recommending one option over another"? If that answer is yes, then proceed with caution. It doesn't make it the wrong recommendation, but it can make it a more complex recommendation that is harder to justify if any litigation ever occurs. If litigation doesn't occur, that recommendation can still cost you and your participants a lot in added investment management fees and possibly lower performance. As margins have been squeezed in the retirement plan advisory space, firms have looked to alternative forms of revenue. HSA's, cross-selling of health benefits, and even proprietary collective investment trusts. Unfortunately, this can undermine the very independence that Plan Sponsors value so dearly. So make sure you aren't "Doing it wrong for more"!

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