These investment manager self-dealing lawsuits have been among the more successful ERISA lawsuits in 2018. In a rising stock market, none of these fiduciary duty cases have been slam dunks because they depend on complicated questions of benefit/harm and disregard of employee interests. But what happens if market goes south?
The Facts and Allegations
The Complaint alleges that SEI Company (SEIC) offered participants only proprietary investment options that generated fees for SEIC. The basic argument is that the company treated plan participants as captive customers in order to prop up SEI-affiliated investment products.
Outrage aside, this is not a simple argument for two reasons. First, including proprietary investment options in a 401(k) plan lineup is not, by itself, illegal. Fiduciaries have a legal duty to select a menu of prudent investment choices, review those options on a regular basis to make sure that they remain sensible, and weed out costly or poorly-performing ones. The menu may include proprietary investment funds; it may not. But it is a little suspect when the plan includes only options that generate fees for the employer, who also administers the 401(k) plan.
Second, plan fiduciaries are not guarantors of investment results. Investment decisions always carry some risk. Nonetheless, in their Complaint, the plaintiffs argue that SEI-affiliated products were not popular within the fiduciary marketplace. No other defined contribution plan of similar size consisted exclusively of SEI-affiliated investment products during the period in question. In fact, the vast majority of similarly-sized plans offered no SEI-affiliated investments. So, it seems that other retirement plans might have thought they were too risky.
The plan participants ask the court to conclude that plan’s investment committee failed to meet the prudence and loyalty requirements of ERISA because it was driven, at least in part, by a desire to generate revenue for SEIC. That conclusion requires an inference, but it may be a reasonable one.
The ERISA Requirements of Loyalty and Prudence
ERISA requires fiduciaries to act “solely in the interest of the participants and beneficiaries,” with the “care, skill, prudence, and diligence” that would be expected in managing a plan of similar character. It is a standard that leaves no room for self-dealing because of the emphasis it places on the exclusive benefit of participants and beneficiaries.
But these standards are not self-enforcing. Especially in the case of defined contribution plans, like the SEI 401(K) plan, the risk of poor investment performance falls solely on the plan participants. If the participant’s self-selected investments flounder, the participant is out of luck – tough times for the people who have something to do other than watch their investments. But what if the problem was a thin menu of self-directed investment options or fees that were too high in the first place?
A plan sponsor has no economic incentive to do a good fiduciary job by monitoring the performance of investment options and the reasonableness of administrative fees. Moral suasion only goes so far. The participants’ only practical recourse is litigation.
It’s been catnip for investment manager firms that offer their employees 401(k) plans. The temptation seems to have been overwhelming. In 2018, a wave of class action lawsuits accused fund companies of packing employees’ 401(k) pension plans with their own funds and charging excessive fees, thus putting the firm’s’ financial interest ahead their employees’.
Among the firms caught up in this scheme have been BlackRock, Fidelity, Invesco, and T. Rowe Price. Other financial firms have been implicated, as well, going back to at least 2016.
The ERISA Litigation Future
ERISA lawsuits tend to fall into distinct patterns. Several years ago, there was a rash of lawsuits involving employee stock option plans (ESOPs) and over-valued company stock. Lawsuits based on precipitous declines in the value of stock (“stock-drop” lawsuits) seem to have faded over the past several years, with legal precedents that have made them more difficult to bring.
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In a down year, the litigation emphasis may shift more towards investment performance. Either way, the best defense retirement plan participants have against mismanagement is continued vigilance. It continues to be important for 401(k) plan participants to review their periodic statements so that they can remain aware of investment performance issues, take an active role in making fund choices and monitor administrative expenses.
Plan administrators have a legal obligation to disclose investment and administrative information. Where participants get unsatisfactory responses to reasonable questions, it may be necessary to seek legal assistance.