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Participants Sue Another Financial Services Provider

Yet another financial services provider finds itself accused of financial self-dealing in the operation of its 401(k) plan.

The most recent suit, brought in the United States District Court for the Western District of Missouri Western Division by a current and former participant of the American Century plan allege that “at all stages, both in selecting the Plan’s designated investment alternatives and in monitoring those investments, Defendants only considered investments affiliated with American Century, in furtherance of their own financial interests, rather than the interests of Plan participants.”

The Counts

Plaintiffs assert claims against defendants for breach of the fiduciary duties of loyalty and prudence (Count 1), failure to monitor fiduciaries (Count 2), prohibited transactions with a party-in-interest (Count 3), prohibited transactions with a fiduciary (Count 4), and for equitable restitution of ill-gotten proceeds (Count 5).

The plaintiffs maintain that in a defined contribution plan the employer has no incentive to keep costs low or to closely monitor the plan to ensure every investment remains prudent, because all risks related to high fees and poorly performing investments are borne by the employee. Moreover, they assert that employers often benefit from retaining higher-cost investments in the plan, because such investments often rely on revenue sharing to subsidize the plan’s administrative costs. And if that weren’t enough, they go on to claim that for financial service companies in particular the potential for imprudent and disloyal conduct is even greater, “because the plan’s fiduciaries are in a position to benefit the company through the plan’s investment decisions by, for example, filling the plan with higher-cost proprietary investment products that a disinterested fiduciary would not choose.”

Here they allege that defendants have used the plan “as an opportunity to promote American Century’s mutual fund business and maximize profits at the expense of the Plan and its participants,” noting that the plan’s menu contains only American Century’s investment offerings, and that the “retention of these proprietary mutual funds has cost plan participants millions of dollars in excess fees.” The lawsuit states that in 2013, the plan’s total expenses were 48% higher than the average retirement plan with between $500 million and $1 billion in assets (the plan had $577 million in assets as of the end of 2013), going on to claim that that variance “can be attributed almost entirely” to:

  • the defendants’ selection and retention of high-cost proprietary mutual funds as investment options within the plan;

  • their failure to select the least expensive share class available for the plan’s designated investment alternatives; and

  • their failure to monitor and control recordkeeping expenses.

Industry Averages

Citing industry averages, the plaintiffs claim that in 2010 the plan was 38% more expensive than the average similarly sized plan, and, as noted above, in 2013 it was 48% more expensive. They go on to note, however, that that doesn’t capture the full extent of the problem. “The fees for funds within the Plan as of year-end 2013 (as disclosed in the Plan’s 2013 Form 5500) were up to 24 times higher than alternatives in the same investment style. Indeed, for every fund in the Plan, there was a fund available from outside the American Century family with significantly lower expenses.” Beyond that, they also cite as a fiduciary breach the failure to include R6 share class options (which they claim were 5 to 15 basis points less expensive) of the ACM funds until 2014.

Recordkeeping Rationale

Relying on “information currently available to Plaintiffs regarding the Plan’s investments, the nature of the administrative services provided, and the Plan’s participant level (roughly 2,000 to 2,300 during the statutory time period), and the recordkeeping market, the outside limit of a reasonable recordkeeping fee for the Plan from 2010 to the present would have been between $50 and $60 per participant,” or between approximately $112,700 and $135,000. “Instead, based upon the disclosures in the Plan’s 2011 Form 5500s, Plaintiffs estimate that the Plan’s recordkeeper at the time, JPMorgan Retirement Plan Services, received approximately $800,000 in revenue sharing dollars. While plaintiffs acknowledge they have less information since the switch to Schwab as recordkeeper in November 2013, “based on Defendants’ past practice, and the information that has been made available, it appears that the Plan has continued to pay grossly excessive recordkeeping fees.”

Plaintiffs also challenge the use of “short-term minimal return money market funds while failing to consider a stable value fund,” and they also have issues with the self-directed brokerage account (SDBA) within the plan, and while they acknowledge that usage of the SDBA is higher within than industry statistics would suggest, they go on to state that that result is “no doubt due to Defendants’ imprudence and self-dealing” (less than 7% of the plan’s assets are held in SDBAs).

In addition to being the investment manager for the plan investments, plaintiffs cite their role as transfer agent and dividend-paying agent for the funds, the overlapping roles of members of the plan investment committee as well as their roles as directors of various ACM funds, their appointment of members of the plan investment committee, and the failure to monitor and remove committee members who were not fulfilling their obligations as plan fiduciaries.

While legal precedents are certainly mentioned throughout the filing, it also contains what appeared to be an unusually robust number of citations of industry articles.

The case is Wildman v. American Century Servs., LLC, W.D. Mo., No. 4:16-cv-00737, complaint filed 6/30/16. Overland Park, Kansas-based Brady & Associates represents the class.