Another Money Manager Menu Draws Suit

Another investment manager has been sued by participants of its own 401(k) plan for what they said were “conflicted, disloyal, imprudent, and self-interested decisions.”

This suit, brought by D’Ann Patterson against Capital Group (on behalf of herself and the 7,000+ participants and beneficiaries of the plan), alleges that “during the Relevant Period, between 94.7% and 97.8% of all investment options offered by the Plan were unduly expensive Capital Group-affiliated investment options.” The suit alleges that these investment options were not selected and retained as a result of an impartial or prudent process, but (according to the suit) “were instead selected and retained by the Committee because Capital Group and its subsidiaries benefited financially from their inclusion in the Plan.”

In the case (Patterson v. Capital Grp. Cos., C.D. Cal., No. 2:17-cv-04399, complaint filed 6/13/17), the plaintiffs took issue (in a 146-page complaint) with the $3 billion plan’s decision to select and retain “…the more expansive R5 share class of the unduly expensive Capital Group-affiliated investment options managed by CGTC, CRMC, and/or CII for a number of years despite the availability of the less expensive R6 share class,” going on to claim that the firm’s “failure to properly evaluate and monitor the Plan’s investment options for both reasonable costs and performance levels through an impartial or prudent process—resulted in Plan participants and beneficiaries paying excessive and prohibited fees that substantially diminished their retirement savings, and resulted in windfall profits for Capital Group and its subsidiaries.”

Menu Math?

While it is not unusual for such lawsuits to spend time and space (and tables) outlining gaps in performance and fees, this one takes the menu on one fund after another – through 26 core funds, then to (and through) a half dozen of the portfolio series “funds of funds,” then through the entire series of target-date funds (all the way through 2060) and then to each of the Collective Investment Trust (CIT) offered by the program – along the way making the case that the fees charged were “well in excess of the fees” charged by the unaffiliated companies for comparable funds.

The suit also alleges that Capital Group’s Board “which had the discretion, authority, and responsibility to appoint the members of the Committee—breached its duty to monitor the Committee members in their performance of their fiduciary functions,” and that “despite knowing of the breaches of fiduciary duties and prohibited transactions, the Board, the Committee, and CGTC failed to prevent them in violation of ERISA § 405, 29 U.S.C. § 1105, and are therefore liable for the fiduciary breaches and the prohibited transactions at issue as co-fiduciaries.” The plaintiffs, represented by Keller Rohrback L.L.P., also claim that Capital Group, CGTC, CRMC and CII are liable under ERISA § 502(a)(3), 29 U.S.C. § 1132(a)(3), to “disgorge the ill-gotten gains and provide other appropriate equitable relief for participating in the fiduciary breaches of the Board, the Committee, and/or CGTC, as well as the prohibited transactions alleged herein.”

Proprietary Paths

Investment management firms have been consistent litigation targets of late, including BlackRockT. Rowe PriceJ.P. Morgan ChaseAmerican Century and Franklin Templeton.

Add Your Comments

5 Comments

  1. David J. Kupstas
    Posted June 15, 2017 at 10:14 am | Permalink

    The participants bringing this suit seem pretty sharp. One wonders why, if it was so apparent that the fees were too high, they didn’t just exercise their right not to defer into the plan.

  2. DP
    Posted June 15, 2017 at 11:20 am | Permalink

    Ahhhh, maybe because they can deduct 3 to 4 times more into a 401K than an IRA? Maybe because there was a match? Profit share? Maybe the state they are in doesn’t protect IRA contributions from civil suits?

  3. Ken rogers
    Posted June 15, 2017 at 12:51 pm | Permalink

    Would they sue if R6 was used and they had a recordkeeping fee north of 5bps? Just go work somewhere else…

  4. Ken rogers
    Posted June 15, 2017 at 12:53 pm | Permalink

    Maybe they could get R6 but the match and ps go away….would they sue cuz they didn’t get a match?

  5. An inquiring mind
    Posted June 15, 2017 at 1:31 pm | Permalink

    Do we know whether the plan’s menu included funds managed by a manager unaffiliated with Capital Group? Enough for participants to have an adequate range?

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