A new participant lawsuit claims that an asset allocation program “was not a model of asset allocation but a model of plan mismanagement.”
The plaintiffs in the case are participants in the AutoZone 401(k) plan, which has some $545 million in assets and approximately 15,000 participants, according to the suit – and while they raise a number of issues in common with this genre of excessive fee lawsuits, they devote most of their focus on Prudential’s GoalMaker offering, which had been established as the plan’s default investment option.
Specifically, the suit (Miller v. AutoZone, Inc., W.D. Tenn., No. 2:19-cv-02779, complaint 11/13/19) explains that the plaintiffs (Faith Miller and Michael J. Iannone, Jr.) bring this action “because of AutoZone’s extraordinary breaches of its fiduciary duties under ERISA, including the approval, maintenance and recommendation of an abusive ‘GoalMaker’ asset allocation service furnished by Prudential Insurance Company that served Prudential’s interests.”
The plaintiffs allege that the GoalMaker offering did so by “funneling participants’ retirement savings into Prudential’s own shamelessly overpriced proprietary investment products and into investments that paid kickbacks to Prudential.” Moreover, they claim that GoalMaker “brazenly excluded the reliable, low-cost index funds in the Plan’s investment menu available from reputable providers that did not pay kickbacks to Prudential” – which, they claim “resulted in the participants paying excessive investment management fees, administrative expenses, and other costs, which over the Class Period cost participants more than $60 million in retirement savings.”
The plaintiffs further allege that “AutoZone could have easily stopped these abuses at any time by replacing the obscenely high-fee, chronically underperforming GoalMaker funds with reliable, low-fee Vanguard index funds already in the Plan’s investment menu.”
Moreover, they claim that “with the exception of one or two bond funds only, this is a pay-to-play scheme.” To be included in GoalMaker, a fund had to be managed by Prudential or its affiliates or pay fees to Prudential or its affiliates.
Not that they didn’t see the benefit in an asset allocation service. In fact, the suit notes that “the use of an asset allocation service can be of significant benefit to a participant in selecting a portfolio from a plan’s investment menu,” and that “a retirement investor with limited time or investment experience could benefit from the use of such a resource…”. However, they go on to state that that would be the case “if monitored by a prudent fiduciary that has the participants’ best interests in mind. Regrettably, such is not the case with GoalMaker.”
GoalMaker wasn’t the only sticking point for these plaintiffs. They also took issue with the Prudential GIC in the plan, alleging that “AutoZone did not have a viable methodology for monitoring the costs or performance of the Prudential GIC,” and that “not only were comparable products available from other providers with higher crediting rates, but an identical product was available from Prudential with higher crediting rates and lower spread fees.” They claim that “on the basis of the excessive spread fees alone, the Prudential stable value fund was an imprudent investment which should have been removed from the Plan.”
As other such suits have alleged, this suit also takes issue with the recordkeeping fees, claiming (without citation, it should be noted) that at the “Plan's participant level (10,000 to 15,000 during the Class Period) and the recordkeeping market, the outside limit of a reasonable recordkeeping fee for the Plan would have been no more than $50 per participant or $500,000 to $750,000 per year for the Plan (about $4.5 million total) over the six year Class Period.”
However, they claim that “Prudential’s compensation from all sources was many multiples of this amount.” The plaintiffs allege that the stable value fund alone generated more than $10 million in excess spread fees, that third-party payments kicked back an additional $3-4 million in fees and investment management fees from proprietary funds netted an additional $10 million or more.
It’s not the first time that plaintiffs have filed suit based on the GoalMaker structure and fees (see Prudential Prevails Again Over Pay-to-Play Allegations), though to date those suits have not succeeded at trial.