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Plan’s ‘Imprudent Preference’ for Proprietary Funds Draws Suit


Noting that the plaintiff’s “account would have been worth more at the time it was distributed from the Plan had Defendant not violated ERISA,” the plan fiduciaries of a provider’s plan find themselves targeted by a participant in its own 401(k) plan.

This time the target is John Hancock, which finds its practices challenged by plaintiff Jennifer Baker, a participant in the John Hancock plan from 2014 until 2019. 

The suit alleges a breach of fiduciary duties “to the detriment of the Plan and its participants and beneficiaries, by applying an imprudent and inappropriate preference for John Hancock products within the Plan, despite their poor performance, high costs, and lack of traction among fiduciaries of similarly-sized plans”—a practice the suit claims “…has resulted in tens of millions of dollars in lost investment returns to the Plan and its participants since the start of the class period in 2014.”

Monitor ‘Ring’

Beyond that, the suit charges that the fiduciary defendants here “failed to monitor or control the Plan’s administrative expenses, costing the Plan millions of dollars in excessive administrative fees over the course of the class period.”

According to the suit, the plan, which since 2015 has had between $1.4 billion and $1.8 billion in assets and between 9,100 and 9,800 participants, had a menu available to participants that “consisted entirely of proprietary investment products affiliated with John Hancock: 43 John Hancock actively-managed funds, four John Hancock passive index funds, a suite of John Hancock target date funds, a suite of John Hancock target risk funds, and a guaranteed interest account branded as the John Hancock Fixed Income fund.”

The suit (Baker v. John Hancock Life Ins. Co., D. Mass., No. 1:20-cv-10397, complaint 2/27/20)—a relatively modest 28 pages long—notes that the plan’s five target risk funds “offer a good example of Defendant’s imprudent and self-interested process for managing the Plan’s investments.” Specifically, the plan’s menu included all five of John Hancock’s target-risk funds (Multimanager Lifestyle Balanced, Conservative, Moderate, Growth and Aggressive) throughout the class period, and for most of that period, the John Hancock Multimanager Lifestyle Balanced Fund was the default fund for participants who did not elect an investment. Now, aside from the performance shortcomings these options manifested during the period (at least according to plaintiff Baker), the suit notes that, “based on a review of publicly-filed Form 5500s from the 2017 and 2018 plan years for plans with over $500 million in assets, Plaintiff is not aware of any defined contribution plan other than the Plan that offered John Hancock’s target-risk funds (Multimanager Lifestyle Balanced, Conservative, Moderate, Growth or Aggressive) during that time period.”

The plaintiff’s suit cautions that “for financial service companies like John Hancock, the potential for imprudent and disloyal conduct is especially high, because the plan’s fiduciaries are in a position to benefit the company through the plan by, for example, using proprietary investment products that a non-conflicted and objective fiduciary would not choose.”

The suit alleges that the defendant “used the Plan—one of the largest 401(k) plans in the country—to promote John Hancock’s proprietary financial products and earn profits for John Hancock.”

The suit also claims that the fiduciary defendants “…also kept the Plan invested in proprietary funds that were failing in the marketplace, leaving Plan participants as some of the very last investors propping up the funds. For example, in June 2019, John Hancock announced the liquidation of six of its proprietary funds in the marketplace because continuation of those funds was “not in the best interests of the fund or its shareholders as a result of factors or events adversely affecting the fund’s ability to conduct its business and operations in an economically viable manner.” In other words, the suit claims, “…the funds had failed to attract sufficient investment in the marketplace to be economically viable.”

The suit goes on to allege that of the six funds that John Hancock announced it would liquidate in June 2019, five were still in the Plan as of Dec. 31, 2018, and that “the Plan’s investment in each of these funds represented a substantial percentage of total fund assets (although, according to the examples cited in the suit, ”substantial” means approximately 10% in one case, and “over 16%” in another).

Infer Null?

The suit notes that, as of year-end 2018, the plan had over $1.6 billion invested in John Hancock funds, resulting in total recordkeeping payments of approximately $1.6 million—and that having 9,807 participants at this time, that translated into recordkeeping expenses that amounted to $163 per participant per year, whereas the plaintiff argues that “…a prudent and loyal fiduciary of a similarly sized plan could have obtained comparable recordkeeping services for approximately $50 per participant at that time.” The suit also notes that “in 2015, the Plan and another related plan, with 10,646 participants combined, paid the Plan’s recordkeeper over $2.3 million, or over $217 per participant.”

“Based on the excessive amounts paid by the Plan for recordkeeping services, it is reasonable to infer that Defendant failed to take these measures (or took half-measures at best),” the suit claims.

The plaintiff in this suit—the latest in a litany of excessive fee/proprietary fund suits filed against financial services firms—is represented by Block & Leviton LLP and Nichols Kaster PLLP, the latter having taken on a number of these type lawsuits, including M&T Bank, MFS, SEI and Goldman Sachs, as well as suits involving Deutsche Bank Americas Holding Corp.BB&T and American Airlines.