The law firm of Schlichter, Bogard & Denton LLP has a new target—and this time it involves collective investment trusts.
The suit was filed in the U.S. District Court for the Northern District of Illinois by eight former employees of drug maker Astellas US LLC, a $932 million, plan of some 3,967 participants—and if that’s somewhat smaller than the programs that typically find their practices in the St. Louis-based law firm, the plaintiffs argued—as every excessive fee case to date has—that the plan’s size “gave it substantial bargaining power to command very low investment management fees for its participants.”
Collective Restructuring
The Astellas plan hadn’t always been invested in collective investment trusts. According to the suit, the Astellas Defendants initially hired Aon Hewitt to provide investment advisory services with respect to the plan, and then, effective Aug. 26, 2016, Astellas and the Administrative Committee expanded that responsibility and appointed Aon Hewitt as the discretionary investment manager for the plan with discretion over the selection, retention and removal of Plan investments. And then, “on or about October 3, 2016, Defendants restructured the Plan.”
The suit (Miller v. Astellas US LLC, N.D. Ill., No. 1:20-cv-03882, complaint 7/1/20) says that the Astellas Defendants “partnered with Aon Hewitt” to develop a new investment lineup—one that, with a single exception (T. Rowe Price Health Sciences mutual fund), resulted in the removal of all of the plan’s mutual funds (none in total) and their replacement with six collective investment trusts. Five of those collective investment trusts were Aon Hewitt’s proprietary collective trusts (they also replaced five of the Plan’s BlackRock collective investment trusts with those managed by State Street Global Advisors Trust Company (SSgA)).
Hire ‘Power?’
The suit notes that, as both Aon Trust Company and Aon Hewitt are wholly owned subsidiaries of Aon Consulting, Inc. “Aon Trust Company hired Aon Hewitt—effectively hired itself—as the investment adviser to perform investment advisory and investment management services with respect to each fund.” The suit also states that Aon Trust Company and Aon Hewitt did not offer collective investment trusts to investors until October 2013, and that prior to that time “Aon Hewitt had not served as an investment manager of any collective investment trust provided to defined contribution plans.”
The suit claims that the defendants failed to conduct an independent investigation into the merits of the Aon Hewitt collective investment trusts prior to placing them in the Plan—noting that, “besides being Aon Hewitt funds selected by Aon Hewitt, the funds had a limited performance history of less than three years when Defendants decided to include them in the Plan.” As you might expect, the plaintiffs claim that “over that limited history, all of the Aon Hewitt collective investment trusts underperformed the benchmarks selected by Aon Hewitt and their style-specific benchmarks,” and they “also underperformed the comparable Plan mutual funds they replaced, which had established investment histories.”
Conflicted Conclusion?
Moreover, the plaintiffs claim that, “as the investment adviser of these collective investment trusts, Aon Hewitt had a direct conflict of interest between acting in the exclusive best interest of Plan participants as the Plan’s discretionary investment manager while also seeking to grow its collective investment trust business and maximize its revenue through investment advisory fees.” The suit alleges that plan participants were not informed that Aon Hewitt was the entity that selected these investments, nor were they informed of the internal decision-making process that defendants employed prior to selecting the Aon Hewitt funds.
Indeed, the suit claims that “Aon Hewitt does not actually manage the assets of the Aon Hewitt collective investment trusts,” but that it instead “hires one or more unaffiliated investment managers (or sub-advisors) to do the actual investing.” For its work in hiring the manager or sub-advisor, “Aon Hewitt collects an investment ‘advisory’ fee charged to fund investors for its services in hiring the manager or sub-advisor, and Aon Trust Company charges an additional trustee fee”—a structure, the plaintiffs argue that “results in investors paying multiple layers of fees, including an investment ‘advisory’ fee to Aon Hewitt even though Aon Hewitt is not doing the actual selection of securities.”
‘Family’ Business
The plaintiffs point to what it describes as the “substantial revenue” that Aon Hewitt earned following its decision to add the proprietary Aon Hewitt funds to the Plan, and perhaps more significantly, that “by causing the Plan to invest in its funds, Aon Hewitt dramatically increased its assets under management for these funds.” Indeed, the suit claims that the plan’s investment in the Aon Hewitt Large Cap Equity Fund and the Aon Hewitt Small & Mid Cap Equity Fund “more than doubled the assets previously invested these funds.” As a result, the plaintiffs state that Aon Hewitt’s collective investment trust business has therefore “materially benefitted from the Plan’s immediate and substantial investment of hundreds of millions of dollars in Aon Hewitt’s proprietary funds.”
Suffice it to say that these collective funds were actively managed, an issue the plaintiffs here (as plaintiffs in many other excessive fee suits have) jumped on since, they argue, “To the extent managers show any sustainable ability to beat the market, the outperformance is nearly always dwarfed by fund expenses.”
Roughly half the 58-page suit is consumed with a detailed, fund-by-fund dressing down, in each case claiming that (a) the fund “had an insufficient performance history,” that (b) Aon Hewitt was unable to successfully manage the strategy by generating investment returns that exceeded its style-specific benchmark or a passively managed equivalent, and that (c) Defendants “failed to make a reasoned decision that adding the actively managed fund” cited “was in the best interest of Plan participants or prudent, and failed to determine whether participants would be better served by other prudent and better performing alternatives available to the Plan after considering all relevant factors.”
Ultimately, then, “despite the fact that lower-cost shares for the exact same investment option were available to the Plan, the Astellas Defendants selected and continue to maintain higher-cost shares for Plan investment options than were available to the Plan based on its substantial size.”
Ultimately, the plaintiffs allege that while “Aon Hewitt received hundreds of millions of dollars in Plan assets as seed money for its investment management business and significant fee revenues, participants sustained massive losses in retirement savings due to high fees and poor performance.” They argue that the fiduciary defendants here “failed to engage in a reasoned decision-making process to determine that using the Aon Hewitt funds was in the best interests of Plan participants or prudent, and failed to determine whether participants would be better served by other prudent and better performing alternatives available to the Plan after considering all relevant factors.”
This is not the first suit Schlichter Bogard & Denton have filed against Aon Hewitt involving its role as investment manager/consultant—having challenged the restructuring of the $3.7 billion Schneider Electric Holdings Inc.'s 401(k) plan in late May. And from the looks of things, it might not be the last.
NOTE: In litigation there are always (at least) two sides to every story. However factual it may turn out to be, the initial lawsuit in any action is only one side, and one generally crafted toward a particular result. In our coverage you'll see descriptions of events qualified with statements such as “the suit says,” or “the plaintiffs allege”—and qualifiers should serve as a reminder of that reality.
