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Another Provider Hit With Proprietary Fund Suit

Despite those admonitions about the wisdom of eating your own cooking, another provider has been sued by its participants for the use of proprietary fund offerings in their 401(k).

The suit, filed in U.S. District Court in Santa Ana, California, by plaintiffs Aleksandr Urakhchin and Nathan Marfice (both current plan participants, according to the filing, though Pensions & Investments notes that they are no longer employed there) charges that participants in PIMCO’s 401(k) pay more than 75% more in fees that the average U.S. 401(k) plan because they are given a choice of only PIMCO and Allianz funds. The suit is seeking class-action status to cover approximately 4,000 employees in the defined contribution plan.

The suit claims that among the 551 DC plans in the United States with between $500 million and $1 billion in assets as of the end of 2013, the plan was one of only eight that had total plan costs that were 0.74% (of total plan assets) or higher — costs that the suit says “can be attributed entirely to the Fiduciary Defendants’ selection of high-cost proprietary mutual funds as investment options within the Plan.” Using 2013 year-end balances and taking into account all administrative and investment expenses, total plan costs were $5.95 million, equal to 0.77% of the $772 million in plan assets, the lawsuit says. Citing data from the Investment Company Institute, the suit claims that “In 2013, the average total plan cost for plans with between $500 million and $1 billion in assets was 0.44%.”

The suit also alleges “a pattern and practice of adding new and unproven mutual funds as investment options within the Plan shortly after the new funds are launched,” and that the plan fiduciaries “even use the Plan’s default investment option as a mechanism for providing seed money to these funds.”

The suit alleges that “throughout the statutory period, the only ‘core’ investment options offered within the Plan have been investments managed by either PIMCO or Allianz Global Investors,” 43 proprietary mutual funds and a self-directed brokerage account, including 11 target-date mutual funds, 3 balanced funds, 12 domestic equity funds, 7 global/international equity funds, 3 domestic bond funds, 3 international bond funds, 1 money market fund and 3 specialty funds (a technology, commodities and real estate fund). However, the lawsuit says employees could have saved $2.5 million if lower cost options from other managers, including index funds, were included in their 401(k) plan offerings.

While other so-called “excessive” fee judgements have looked favorably on the availability of a self-directed brokerage account (SDBA) alongside a proprietary fund menu (e.g., Hecker v. Deere), here plaintiffs argue that “…those who choose to utilize an SDBA are typically assessed an account fee and a fee for each trade” — fees that they say “often make an SDBA a much more expensive option compared to investing in the core options available within the Plan.” Additionally, they claim that because “employees investing in mutual funds within an SDBA must invest in retail mutual funds, rather than the lower-cost institutional shares typically available as core investment options,” those who do use the option again pay higher fees.

At this stage in such actions, detailed comments are generally not forthcoming from plaintiffs. However, P&I quotes Petra Brandes, a spokeswoman for Allianz Asset Management, as noting that the lawsuit was “without merit and we are confident it will be resolved accordingly.”

A year ago, Fidelity settled a suit by its plan participants alleging excessive fees associated with the use of proprietary funds, as has Ameriprise, while one by MassMutual workers remains active.