Skip to main content

You are here


‘Belated’ Lineup Changes Criticized in Proprietary Fund Suit


Yet another financial services firm has been charged with displaying “self-interest and disregard for participants by retaining high-cost, poorly performing proprietary mutual funds in the Plan.” And subsequent menu changes are being touted as evidence that the fiduciaries should have known better.

This time the target is Goldman Sachs and its $7.5 billion 401(k) plan on behalf of some 35,000 participants, according to the lawsuit – another filed by Nichols Kaster PLLP (and MKLLC Law).

The suit (Falberg v. Goldman Sachs Grp., Inc., S.D.N.Y., No. 1:19-cv-09910, complaint 10/25/19) alleges that the Goldman Sachs defendants “…retained these proprietary funds despite persistent underperformance and steep asset declines, adversely affecting participant balances while allowing Goldman Sachs to continue to draw fees and stem the consequences of losing one of the of the largest investors in the funds – the Plan.” And while those fiduciaries did, in fact, remove those funds from the plan in 2017, the plaintiffs allege that they did so “only reluctantly and belatedly” – “after other self-dealing firms were successfully brought to court over similar practices,” when – they argue – an “objective fiduciary in the same position would have removed these funds promptly at the start of the class period, and certainly before 2017.” 

Ultimately, the suit claims that “the circumstances of Defendants’ retention and belated removal of these proprietary funds demonstrates that Defendants’ process for managing the Plan and monitoring Plan investments was deeply flawed and improperly influenced by the interests of Goldman Sachs, in breach of Defendants’ fiduciary duties.”

The plaintiffs state that the Goldman Sachs mutual funds in the Plan were actively managed, and that – other than money markets – there were five proprietary mutual funds in the Plan’s single-strategy menu at the end of 2013: the Goldman Sachs Large Cap Value Fund, the Goldman Sachs Mid Cap Value Fund, the Goldman Sachs High Yield Fund and the Goldman Sachs Core Fixed Income Fund. Those funds, according to the suit, “charged high fees relative to the average mutual funds held by similarly-sized plans.” 

Now, averages can be tricky things, but the plaintiffs argue that, among plans with more than $1 billion in assets that held mutual funds in 2013, the average expense ratio for domestic equity funds was 0.44%, while the Goldman Sachs Large Value Fund and Goldman Sachs Mid Cap Value Fund, both domestic equity funds, cost 0.79% and 0.75%, respectively – and, they argue that index mutual funds similar to the Goldman Sachs domestic equity funds were available for less than 0.10%, and actively managed funds for between 0.31% and 0.68%.

As for bonds, the plaintiffs claims that in 2013, plans with more than $1 billion paid 0.34% in expenses on average, while the proprietary options in the plan charged 0.71%, 0.47%, and 0.50%, respectively (they also claim that index mutual funds similar to the Goldman Sachs domestic bond funds were available for between 0.05% and 0.15% or less, and other actively managed funds for between 0.19% and 0.40%). The plaintiffs also argued that the fund choices underperformed their benchmarks over 3-, 5- and 10-year periods.

“Defendants did not even have to look outside their own firm. Goldman Sachs’s asset management subsidiary GSAM offers institutional clients separately managed accounts in the same investment styles as the proprietary mutual funds (which are also managed by GSAM) that Defendants held on behalf of the Plan. Doing so the Plan would have saved 0.10% to 0.30% in fees by switching to GSAM separate accounts.”

They go on to argue that “when Defendants belatedly removed underperforming Goldman Sachs funds, Defendants confirmed that separate accounts and collective trusts were the best option for participants as a result of their lower fees. Defendants selected a mid cap value separate account managed by Sycamore to replace the Goldman Sachs Mid Cap Value Fund, lowering the cost of this strategy from 0.76% to 0.55%. Defendants also now offer US large cap value and core fixed income strategies in collective trust form, after removal of the Goldman Sachs mutual funds.

“Unfortunately for Plan participants, investing in mutual funds in place of other institutional investment vehicles was not the only way that Defendants skimmed extra fees from the Plan for the benefit of Goldman Sachs,” the suit continues, noting that the plan fiduciaries decided to keep the fee rebates from the funds in 2015 and 2016 (some $1 million, according to the complaint), rather than offset them against the fees paid by participants. And – when the plan switched to R6 shares – even though they were less expensive funds, the loss of fee rebates meant – according to the plaintiffs – that “the new shares were actually more expensive net of fee rebates.” 

“We dispute the allegations and intend to defend against the lawsuit,” a Goldman spokeswoman told Bloomberg Law.

The lawsuits claim these funds perform worse than unaffiliated options while charging higher fees. Several companies have signed multi-million dollar settlements, including BB&T Corp. ($24 million), Deutsche Bank ($21.9 million), Franklin Templeton ($13.85 million) and Allianz ($12 million).