October 19, 2018

Big fund companies make hundreds of millions of dollars in fees every year from mutual funds and other products they sell to the public—that’s the business. But should they be allowed to profit at the expense of their own employees? Several lawsuits assert that the answer is no.

Corporate “self-dealing” isn’t allowed when setting up and running employee pension plans. But a wave of lawsuits accuse fund companies (and others) of filling employees’ pool of 401(k) retirement investments with their own funds and charging excessive fees for them, using the pension plans as corporate cash cows and putting the firms’ financial interests ahead of those of their employees.

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[These cases] show that 401(k) investors often pay steep fees for funds sold by their employers that don’t produce better returns than low-cost index funds.

Consider T. Rowe’s 401(k). With more than $1.7 billion in assets, it has long held funds and trust accounts managed exclusively by T. Rowe for its 8,200 participants. Investors paid 0.62% in total expenses, including administrative costs and fund fees, in 2014, more than double the 0.3% average for plans with more than $1 billion in assets, according to the lawsuit. For years, T. Rowe offered only the highest-cost, retail shares to its 401(k) participants, while charging lower fees to external clients on institutional share classes, as well as subadvised and trust accounts, the suit claims. Plan participants paid an average 0.73% for every dollar invested in the funds, the suit adds.

Performance has also been sub par, the lawsuit claims. From 2011 through 2016, T. Rowe Price Financial Services (PRISX), for example, lagged behind the Vanguard Financials Index (VFAIX) by 13 percentage points, and the T. Rowe Price Spectrum Growth (PRSGX) trailed its benchmark by 32.2 percentage points, the lawsuit notes.

The suit claims that participants would have earned at least $123 million more in returns had T. Rowe picked lower-cost index funds with average performance. That doesn’t account for the roughly two-thirds of plan assets held as collective investment trusts (for which detailed performance data was not available). “T. Rowe’s fiduciary duty isn’t to make as much money as it can until a court tells them to stop. It’s to provide the best outcome for plan participants,” says Scott Lempert, an attorney with Cohen Milstein Sellers & Toll, who filed the suit.

T. Rowe argued in court that plan documents required the trustees to select an exclusive lineup of T. Rowe investments. The firm structured the plan so that selecting funds was a “settlor function,” claiming that shielded it from Erisa’s fiduciary provisions. The judge, James Bredar, didn’t buy the argument, ruling in August against T. Rowe’s motion to dismiss the case. A company spokesperson says the company will “vigorously defend” itself.

The complete article can be accessed here.