Financial Service Firm 401(k) Sponsors Sued by Own Employees!

September 25, 2017—As a plan sponsor of a 401(k) plan you know – or at least should know – that decisions you make regarding the plan must be in the best interests of your plan participants. This covers all areas of the plan, including your decisions regarding plan investment options. Unfortunately, it is common (in my opinion) for employers not to devote the time necessary to investment options due diligence and instead rely on the investment suggestions made by the plan’s platform provider.

For example, if they have a Principal 401(k) program and Principal suggests that the employer select Principal funds for their plan, the employer will often go along with the recommendation. Business owners should understand that when a mutual fund or life insurance company offers its own investment products to the plan it has a financial incentive to do so, creating a conflict of interest.

Think about it: how does a mutual fund company make its money?

No, not by running 401(k) plans, but by selling their funds to 401(k) plan participants. The goal of the mutual fund company is to get their funds into the plan. The goal of the employer is to have the best funds in the plan. These two goals do not often complement each other.

If you still are thinking to yourself, “well I’m with such-and-such household name firm, and they’ve got my back,” you may want to reconsider. The employees of these same mutual fund and insurance companies apparently don’t even believe their employer has their back. If they did, there would not be so many lawsuits by employees of financial service firms against their own employers for including proprietary funds with excessive costs in the fund line up.

Here is a list of financial service companies whose employees have sued them for using their own funds in the employees’ plans: Allianz, American Century, BB&T Bank, BlackRock, Charles Schwab, Deutsche Bank, Edward Jones, Franklin Templeton, Fidelity, Great West, Jackson National, J.P. Morgan, M& T Bank, Morgan Stanley, New York Life, Principal Life, Putnam, T. Rowe Price, Wells Fargo.

You will notice that these companies are not just small, lesser-known entities. On the contrary, many of them cover a huge portion of the industry, both in terms of assets under management and plan participants. One may even be providing services to your plan presently.

Of all these lawsuits, only two cases to date were resolved in the favor of the financial services company. One of them was against Great-West, who won outright. The other, against Wells Fargo, was dismissed. In these cases, like most of the others, the allegations were of high fees or poor performance for the proprietary (company) funds used in the employee’s plan. For example, the Wells Fargo employees claimed that the Wells Fargo target date funds used in the plan were 2 ½ times the cost of similar target date funds. However, the employees did not make their case that the alternative funds were “similar.” This may indicate that this outcome doesn’t justify the high cost of the Wells Fargo funds, but instead reflects more on how the employees made their case. In the Great-West case the judge didn’t even address the merits of the claims. Great-West got off the hook because the investor lacked standing to pursue their claim in the first place.

As prominent ERISA attorney Ary Rosenbaum wrote in his article “The real reason bad funds are in 401(k) plans,” when researchers looked at data to try to figure out why many poor 401(k) investment choices lingered on fund line-ups they concluded that “a subpar fund is much more likely to stay on the menu if it’s managed by the mutual fund company that’s helping administer the plan.”

The moral of the story is this: if your plan provider also offers their own mutual funds or insurance products, understand the dynamic of the relationship. The provider’s job is to sell you their funds. After all, that’s why they even offer a 401(k) plan in the first place: to distribute their funds. And there is nothing wrong with this. But your job as a plan fiduciary is to ensure that your participants have the best funds you can provide to them. If you do not feel that you have the expertise to fend off your platform provider, then get help from an advisor who is independent and will work for the best interest of the plan participants – not for the fund or insurance company.