Prop Funds in Investment Manager’s Own Plan Can Be Risky

While there are growing questions about the use of a record keeper’s proprietary investments, those questions attract even more attention from regulators and the plaintiff’s bar when proprietary investments are used for an investment manager’s own DC plan.

In a P&I article, Jerome Schlichter is profiled as one the attorneys leading the charge, with his case against Ameriprise, for which he recently won class action, and the more recent lawsuit filed against MassMutual. The fundamental question raised in each case is whether a plan sponsor which also manages money is in a position to determine if those investments are appropriate investments for plan participants.

Though the DOL has provided exemptions, it is getting harder to comply, as illustrated in the case against Wachovia (now owned by Wells Fargo) almost 10 years ago and the more recent suit by Cigna employees against Prudential, which bought the record keeping business — a case that settled for $35 million, with the firm agreeing not to use proprietary funds.

All of these cases were against providers that not only managed money but also provided record keeping services. But does it really matter? Certainly, by providing record keeping services, the issue of revenue sharing comes into play, but it seems that the real issue is whether the investment manager acting as a plan sponsor can or should select and monitor its own investments. According to the Groom Law Group’s Michael Prame, “Using affiliated products and services for an in-house plan involves special challenges that need to be carefully addressed.”

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