Another Provider Charged with ‘Self’ Dealing in its 401(k) Plan

A new lawsuit challenges not only the use of allegedly more expensive proprietary funds, but with no longer offering a stable value fund, and of being negligent in its deployment of a self-directed brokerage account option.

The suit, brought by plaintiff Christopher W. Severson, alleged that “the Schwab Fiduciary Defendants imprudently and disloyally larded the Plan with unnecessary, expensive and poorly performing investment products and services offered and managed by the Schwab Entity Defendants and their affiliates and which paid fees to the Schwab Entity Defendants…”

The suit, Severson v. Charles Schwab Corp. (N.D. Cal., No. 3:17-cv-00285-JCS, complaint filed 1/19/17), also claimed that “the Schwab Fiduciary Defendants made no meaningful investigation into whether these Schwab Affiliated Products and Services were prudent for the Plan, or whether alternative funds offered by other providers would be more appropriate, cost effective or better performing,” charging that the defendants instead “imprudently and disloyally” chose to provide the Schwab products and services to the plan “in an effort to generate fees for the Schwab Entity Defendants at the expense of the Plan and its participants.”

Not only that, but that the “fees collected by the Schwab Entity Defendants from the Plan … were excessive, unreasonable and far exceeded the real costs associated with administering the Plan.”

Index Fund Differences

The suit starts by making an issue of the inclusion of the Schwab S&P 500 Index fund, when other, less expensive options were available. Not that there was much difference; still, the suit claims that “while the 3 to 5 basis point difference in fees between the Schwab S&P 500 Index Fund and the other funds listed in Table 1 may seem small at first glance, the Plan had more than $100 million invested in the Schwab S&P 500 Index Fund each year during the Class Period, meaning that the Plan paid hundreds of thousands of dollars in fees more to Schwab than it would have paid to the other fund providers listed above even when not compounded.”

Moreover, the plan menu “also included seven other Schwab mutual funds, ten Schwab ‘target date’ funds, a Schwab stable value fund, a Schwab money market fund, and a Schwab savings account as investment options,” where “by the year end 2015, over $500 million in Plan assets were invested in these Schwab Affiliated Funds.”

As was the case with other similar suits, the plaintiff takes issue with, first, the choice of a Schwab stable value fund (“prior to 2012 the only stable value fund available to Plan participants was Schwab’s own Schwab Stable Value Fund”), and thereafter the lack of that option at all, and the use of a savings/money market fund.

‘Self’ Directed Brokerage?

Finally, the plaintiffs also challenged the inclusion of a self-directed brokerage account in the plan, first noting that Schwab and its affiliates “collected fees … including transaction fees and commissions and other fees to individual Plan participants who opened Self-Directed Brokerage accounts through the Plan,” and that Schwab received revenue sharing payments from third-party ETF and mutual fund providers whose funds were made available to via the platform. Not satisfied with that, the plaintiffs also claimed that the SDBA’s “byzantine complexity and confusing schedule of fees alone make it inadvisable for all but the most sophisticated of investors,” while the “additional high levels of risk that investors in the Self-Directed Brokerage are able to take on can magnify the risks of investing exponentially.” All that, coupled with the charge that Schwab made the option available to all rather than just more highly compensated or more sophisticated participants, and that it made no effort to determine (a) if the SDBA was a prudent option at all, or (b) if another provider’s SDBA might have been better.

The suit also challenged fees charged on unallocated plan cash from contributions or distributions (plaintiffs characterized this as the defendants making an interest-free loan to themselves).

Similar suits have been filed against Franklin Templeton, M&T Bank, American Century, MassMutual and PIMCO, to name just a few. That’s why offering proprietary funds is just one of the things on this list of things that means your plan might be an excessive fee litigation target.

The Schwab lawsuit was filed in the U.S. District Court for the Northern District of California by Schneider Wallace Cottrell Konecky Wotkyns LLP and Berger & Montague P.C.

Add Your Comments

One Comment

  1. Robb Smith
    Posted January 25, 2017 at 8:54 am | Permalink

    It would be interesting to know the extent of information, education and disclosures provided to participants about the SDBA’s. If participants were provided adequate communication about SDBA’s, including the complexity of additional fees and expenses involved with their utilization, it would be hard to argue the point that such disclosures were to difficult to understand, save for the most sophisticated investors in the group. I would think their argument about SDBA’s would be better served if it was directed at inappropriate allocation of record keeping fees IF those invested in an SDBA were not sharing in those expenses.

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