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Plan Sponsor, Consultant Charged with Fiduciary Breach in Fund Moves

When it rains, it pours – and, for the second time in as many weeks, Aon Hewitt finds itself named in a lawsuit regarding its investment menu build.

The most recent suit was filed by plaintiffs Jeffrey McGinnes, Wendy Berry, Lorri Hulings, and Kathleen Sammons, individually and on behalf of the FirstGroup America, Inc. Retirement Savings Plan, and its 13,000 participants. The suit claims that the defendants “…breached their fiduciary duties under ERISA by engaging in a radical redesign of the Plan’s investment menu that was designed to benefit Hewitt (the Plan’s fiduciary investment consultant) rather than the participants and beneficiaries of the Plan, and have stubbornly adhered to this imprudent menu design in spite of evidence that it has caused significant and ongoing damage to the Plan.”

‘New and Untested’?

The suit alleges that the defendants removed “a large number of established funds in the Plan that were performing well (at Hewitt’s self-interested urging), and replaced them with an unproven set of newly-launched funds from Hewitt that were inappropriate for the Plan and had not been adopted by the fiduciaries of any other retirement plans.” As part of this process, they alleged that the defendants transferred over a quarter billion dollars in Plan assets (more than 90% of the Plan’s total assets) into these “new and untested” funds, and “left participants with no other meaningful investment options.”

How did it turn out? Well, the plaintiffs described the results as “disastrous,” going on to state that since the “experimental” funds were added to the Plan in 2013, “they have consistently underperformed their benchmarks, and have underperformed the funds they replaced by tens of millions of dollars.” They go on to state that despite this, “Defendants have continued to retain these funds, doubling down on their initial imprudent decision and committing further breaches of their ongoing duties to the Plan,” citing the continuing duty to monitor investments articulated by the U.S. Supreme Court in Tibble v. Edison Int’l, 135 S.Ct. 1823, 1828 (2015).

It wasn’t always thus; the suit notes that when Hewitt initially consulted with FirstGroup, “it appears that Hewitt attempted to provide independent advice to the Plan, and helped FirstGroup construct and maintain an investment lineup for the Plan consisting of a diverse set of investment products from a number of different fund managers.” However, the plaintiffs say this changed when Hewitt started a new business venture and began offering its own line of investment products, which it introduced to the 401(k) plan marketplace on or about Sept. 30, 2013 (prior to that date, FirstGroup offered its participants 11 investment options, including a T. Rowe Price target-date option, a stable value fund managed by Wells Fargo, a passive S&P 500 index fund option and eight actively managed mutual funds managed by “experienced managers,” including American Funds, Dodge & Cox, and others).

Invoking language from the recent, similarly positioned lawsuit involving Aon Hewitt and Lowe’s (Reetz v. Lowe’s Cos., W.D.N.C., No. 5:18-cv-00075-RJC-DCK, complaint 4/27/18) the plaintiffs here note that, while Hewitt “attempted to leverage its existing consulting client base to attract investors,” the “overwhelming majority of 401(k) plan sponsors that it advised did not fall for the sales pitch, and rejected the Hewitt Funds for their plans through their own fiduciary screening process.” Not so FirstGroup, which the plaintiffs say was “not as discerning,” and immediately after the Hewitt Funds were launched, FirstGroup became the first employer in the country to include them in its 401(k) Plan, going so far as to make the Hewitt target-date fund series the Plan’s default investment option, and eliminating almost all of the plan’s existing investment options and more than 90% of the plan’s investable assets (more than $250 million).

‘Radical Makeover’

This, the plaintiffs argue, was a “radical makeover” that was “unnecessary, imprudent, and not in the best interest of Plan participants.” They go on to note that “Hewitt only advised FirstGroup to replace the existing funds with Hewitt Funds because Hewitt needed to attract capital for the Hewitt Funds for its own business reasons,” advice they contend was “tainted by Hewitt’s self-interest” – a reality they claim that FirstGroup should have recognized and “independently scrutinized the Hewitt Funds, and rejected them for the Plan.”

The suit goes on to note that when added to the FirstGroup menu, “the Hewitt Funds had no track record at all, and Hewitt did not have experience managing investment products for defined contribution plans” – the latter “alone should have disqualified the Hewitt Funds from consideration for the Plan, as fiduciaries of other retirement plans generally require a performance history of three or more years before considering an investment for a retirement plan,” the suit notes. The plaintiffs also note that the substitution of the Hewitt Funds for the Removed Funds “took away participants’ ability to choose passive investments, and gave them less control over their asset allocation and risk level.”

And, even with the passage of time, the suit notes that “despite Hewitt’s marketing and sales efforts, the Hewitt Funds remain unpopular among fiduciaries of similarly-sized plans in the 401(k) plan marketplace,” explaining that, “according to the most recent public information available, only five other plans with assets of $250 million or more (out of more than 2,600 such plans) have adopted any of the Hewitt Funds, and only two other such plans have adopted the Hewitt target date funds.”

The plaintiffs, represented by Freking Myers & Reul and Nichols Kaster PLLP, filed the suit the U.S. District Court for the Southern District of Ohio, say they are seeking to:

  • remedy this unlawful conduct,

  • recover the Plan’s losses,

  • disgorge the profits that Hewitt wrongfully received,

  • prevent further mismanagement of the Plan, and

  • obtain other appropriate relief as provided by ERISA and otherwise available at law or in equity.

The case is McGinnes v. FirstGroup Am., Inc., S.D. Ohio, No. 1:18-cv-00326-TSB, complaint filed 5/11/18.