Proprietary Fund Offerings Draw Participant Lawsuit

A group of 401(k) plan participants have filed suit against their employer for doubling down on proprietary funds they claim were overpriced and had a “poor or non-existent” performance history.

The complaint in Habib v. M&T Bank Corp. (W.D.N.Y., No. 1:16-cv-00375, complaint filed 5/11/16), said that in late 2010, eight of the plan’s 23 designated investment alternatives were M&T Bank proprietary mutual funds. These funds had expenses that the complaint alleges were, on average, approximately 90% higher than similar funds found in similarly sized DC plans, and all but one of the M&T-affiliated funds had underperformed its benchmark index both over the past year and over the past 10 years.

The complaint goes on to note that the defendants not only failed to remove those funds, “they went in the opposite direction by greatly expanding the lineup of proprietary mutual funds in the Plan,” noting that after M&T finalized its purchase of the distressed Wilmington Trust, and “almost immediately after taking over Wilmington Bank, the Fiduciary Defendants added six out of Wilmington’s nine mutual fund offerings to the Plan, despite their high expenses, and poor or non-existent performance history.”

The plaintiffs said that then over the next five years, “despite the ongoing poor performance and high expenses of the Wilmington Funds, the Fiduciary Defendants kept these imprudent proprietary investments in the Plan, reluctantly removing a few only because the funds themselves ceased their operations.”

The complaint not only accuses the fiduciaries of failing to fulfill their fiduciary obligations under ERISA by not reviewing and removing those funds, but, as others of these so-called excessive fee suits have of late, it also alleges the fiduciaries failed to investigate the use of separate accounts and collective trust alternatives.

The complaint was filed in the U.S. District Court for the Western District of New York by Nichols Kaster PLLP.

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