A new lawsuit claims that plan participants have lost tens of millions of dollars of their retirement savings in fees that have flowed to defendants and their affiliates.
The most recent suit, Orellana v. JPMorgan Chase & Co. (S.D.N.Y., No. 1:17-cv-01575, complaint filed 3/2/17), was filed in the U.S. District Court for the Southern District of New York by Ferdinand Orellana, a participant of the JPMorgan Chase 401(k) Savings Plan. According to the suit, Orellana has invested, inter alia, in the Core Bond Fund, Mid Cap Growth Fund, Small Cap Core Fund, Target Date 2045 Fund, and various other investment options that were offered by the plan and managed by JPMorgan and/or BlackRock-affiliated entities during the class period.
The suit alleges that “as a result of defendants’ disloyalty and imprudence, Plan participants were forced to pay fees that were more than 90% higher for actively managed mutual funds than they could have paid for more reasonably priced comparable investments, and as much as 50% higher for other types of Plan investments. Consequently, Plan participants have lost tens of millions of dollars of their retirement savings during the Class Period in fees that have flowed to defendants and their affiliates.”
This suit mirrors the allegations made in a similar suit filed earlier this year by another JPMorgan plan participant. As in that case, this suit alleges that, “rather than engage in a systematic, arm’s-length review of available Plan investment options, JPMorgan sought out investment options that allowed its affiliates and business partners to reap outsized fees to the detriment of plaintiff and members of the Class.” Specifically, it notes that during the period in question, “half of all Plan investment options were affiliated with JPMorgan entities, while more than 70% were affiliated with either JPMorgan or BlackRock.”
The suit alleges, as have other similar suits, that the $20 billion JPMorgan plan should have been able to strike a better deal for its participants, including availing the plan of “low-cost structures for Plan investments, such as separate accounts or collective trusts, with significantly lower recordkeeping and administrative costs.” However, the suit alleges that “…defendants structured several proprietary funds managed by a JPMorgan affiliate, J.P. Morgan Investment Management Inc. (“JPMIM”), as more expensive mutual funds and placed them as investment options in the Plan.”
Apparently looking to connect some dots, the suit noted that in early 2014, the Office of the Comptroller of the Currency began investigating whether JPMorgan and JPM Bank had improperly funneled client assets into JPMorgan-affiliated funds rather than third-party investment options in order to generate investment fees, and that the SEC subsequently opened its own probe into the matter, culminating in a $267 million settlement and cease-and-desist order with the SEC, as well as an additional $40 million settlement with the U.S. Commodities Futures Trading Commission.
The suit claims that “as intense scrutiny fell on JPM Bank’s self-dealing as a result of the SEC investigation, JPM Bank began to belatedly reduce the fees charged by its proprietary funds and by BlackRock funds to Plan beneficiaries, and in some cases eliminated these investment options altogether.” For example, effective Nov. 6, 2015, the Mid Cap Growth Fund, a JPMIM-managed fund that the suit claims was the most expensive plan option, was eliminated in favor of the S&P Mid Cap 400 Index Fund. “Fees for this ‘mid cap’ investment option subsequently plummeted from 0.93% to 0.04%, a 96% reduction,” according to the suit.
Ultimately, the plaintiff alleges that defendants could have offered plan participants:
- cheaper mutual fund options employing similar strategies;
- passively managed funds that employed similar strategies to the actively managed funds but at a reduced cost;
- options structured as collective trusts and separately managed accounts, rather than more expensive mutual fund options; and
- options that utilized the plan’s immense leverage, economies of scale and bargaining power as one of the largest defined contribution plans in the United States.
“This is what a prudent and loyal Plan fiduciary, which was truly engaged in arm’s length negotiations in the Plan’s best interests, would have done,” according to the suit.