Another excessive fee suit – this one involving a not-so-jumbo plan – claims that 401(k) plan fiduciaries “severely mismanaged the Plan in a myriad of ways,” notably by, in the plaintiff’s words, “imprudently incorporating funds on its menu that were excessively expensive.”
While the plan involved here – Gucci America Inc. – is much smaller ($96.5 million) than those in the so-called “jumbo” status that have garnered most of the headlines in this type of litigation, the plaintiff, filing in U.S. District Court for the District of New Jersey (Hay v. Gucci Am., Inc., D.N.J., No. 2:17-cv-07148, complaint filed 9/15/17) cited the plan’s “substantial assets” and said that the plan fiduciaries “…have significant bargaining power and the ability to demand low-cost administrative and investment management services within the marketplace for administration of 401(k) plans and the investment of 401(k) assets.” Needless to say, perhaps plaintiff Heather Janda Hay didn’t believe the plan fiduciaries had leveraged that power to the advantage of the plan participants.
“Particularly egregious” in the opinion of the plaintiff here was the plan’s investment in proprietary funds of Transamerica Retirement Solutions, LLC, which is the service provider for the plan. In that, according to the plaintiff, the Gucci fiduciaries “failed to exercise even minimal oversight over Transamerica and have unduly relied upon Transamerica, and as a result they claim that “Transamerica has successfully utilized Plan assets in a manner that has been detrimental to the Plan and beneficial to Transamerica insofar as it maximized fees, often at the expense of participants’ return.”
Here the plaintiff noted that “all of the Transamerica funds that the Plan offers as investment options are proprietary funds, despite the fact that the Transamerica website advertises that 'we can offer access to the entire universe of publicly available investments – without any proprietary fund requirements,' and that therefore “Transamerica both distributes the funds in which the Plan invests, and manages the Plan’s investments in the Transamerica funds,” and moreover that “…none of the Transamerica funds offered within the Plan were institutional funds or share classes, despite the fact that institutional funds are usually less costly.”
Or at least they weren’t until 2011, when five of the seven Transamerica funds (which the plaintiff says held slightly less than half of the proprietary assets) were institutional funds. “Although the institutional funds apparently reduced the cost of investing in these proprietary funds by approximately 25 basis points (0.25%), the proprietary institutional government money market fund currently offered –Transamerica Partners Government Institutional Money Market – is significantly costlier than the non-government fund previously offered,” while the government money market fund “has an expense ratio of 50 basis points (0.50%), whereas the non-government fund has an expense ratio of 26 basis points (0.26%).” The plaintiff explained that while the cost of investing in Transamerica’s proprietary funds has “come down slightly as a result of moving to institutional shares, the Transamerica institutional shares are significantly more costly than non-proprietary institutional funds,” specifically citing Vanguard Institutional Class shares.
Revenue Shearing?
The plaintiff here also took issue with the “substantial revenue sharing” (generally approximately 40 basis points) from the third-party mutual funds and one of the Transamerica funds, and noted that “Defendants have failed to ensure that all revenue sharing is utilized on a dollar-for-dollar basis to reduce other Plan expenses and have failed to levelize or equalize the burden imposed by revenue sharing across participants to ensure that they each pay Plan expenses in an equitable manner.”
The plaintiff also challenged the use of Transamerica’s proprietary funds because they were structured as “manager of manager” funds, which they claimed required the plan (and participants) to “pay multiple layers of the fees: (1) to Transamerica, as the fund manager, and (2) to the sub-adviser of the underlying master fund” via a structure that they said “imposes unnecessary and burdensome costs on the Plan and its participants,” particularly since, as they alleged, “401(k) participants generally select the funds in which they invest,” and thus have no need to pay a fee to an overseeing adviser to create sub-advised funds from which participants can choose.”
Outsource Concerns
And, if that weren’t enough, the plaintiff pointed out what they saw as “an extra layer of costs insofar as TFA, the Transamerica funds administrator, has outsourced the provision of most services to State Street,” rather than contracting directly with State Street. All of which, the plaintiff alleges, contribute to higher expenses for the Transamerica fund offerings. In sum, “Defendants have chosen to blindly accept Transamerica’s determination that investing in expensive funds and adding an unnecessary layer of costs (which directly benefits Transamerica insofar as it utilizes its affiliates, as discussed below) constitutes reasonable and prudent behavior. In doing so, Defendants have breached their fiduciary duties.”
The plaintiff also alleged that the funds in question had a poor performance record, and were sub-advised by entities that had a relationship with Transamerica, not to mention arguing that the fiduciaries failed to offer plan participants access to passively managed funds, and allegedly produced misleading and inaccurate disclosures on the plan’s audited financial statements.
Representing the plaintiffs in the case are Shepherd Finkelman Miller & Shah LLP and the Law Offices of Sahag Majarian.
