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Proprietary Funds Draw Self-Dealing Allegations

A new excessive fee suit alleges “corporate self-dealing at the expense of the retirement savings of company employees.”

The most recent is a class action (Feinberg v. T. Rowe Price Group Inc., D. Md., No. 1:17-cv-00427, complaint filed 2/14/17) filed on Valentine’s Day by David G. Feinberg, a participant in the T. Rowe Price U.S. Retirement Program on behalf of the 401(k) Plan and all “similarly situated Plan participants and beneficiaries (henceforth, collectively, “participants”), and all predecessor plans.”

The suit claims that the T. Rowe Price plan fiduciaries breached their fiduciary duties by only offering T. Rowe Price’s own in-house investment funds in its 401(k) Plan, which the plaintiff claims “provided a windfall to T. Rowe Price affiliates T. Rowe Price Associates, Inc. (“TRP Associates”) and T. Rowe Price Trust Company (“TRP Trust”), collectively the ‘TRP Investment Affiliates.’”

This was because of the enormous profitability of T. Rowe Price’s asset management business, and because virtually no additional expenditure or overhead was required to offer its own funds in its own plan. But these profits came at the expense of the retirement savings of T. Rowe Price employees.

The plaintiff in this case notes that while “it is axiomatic in the financial services industry that no single company is the best at managing every asset class or type of investment fund,” but that, “Despite this fact, Defendants refused to consider offering funds from other companies in the 401(k) Plan.”

As other excessive fee suits have alleged, the plaintiff here challenges the use of “higher cost retail class versions of their mutual funds in the 401(k) Plan” when “significantly cheaper versions of these funds were available, including institutional share classes, Collective Investment Trusts, and Separately Managed Accounts.” He also notes that T. Rowe could have used the fact that the 401(k) Plan was a large institutional investor as leverage in negotiations to create cheaper alternatives. Moreover he notes that T. Rowe offered investment management services for some of their Collective Investment Trusts and Institutional Mutual Funds to commercial customers as a sub-advisor for less cost than charged to the Plan. “In so doing, Defendants provided the identical services to 401(k) Plan participants while using their role as fiduciaries to collect higher fees than they otherwise could from third-parties,” in essence using plan assets for their own benefit.

In 2012 and 2014, T. Rowe Price started offering less costly funds, including collective investment trusts and institutional-class shares of mutual funds, according to the suit.

The suit alleges that if the plan had instead used funds “from other established fund companies, such as Vanguard Investments,” participants would have paid “over $27 million less in fees during the Class Period.” Moreover, he asserts that “…if such funds had instead been offered to participants in those asset classes and investment fund categories in which T. Rowe Price performance is weak, participants would have earned over $123 million more,” a figure that the suit says might increase materially, “since Plaintiff currently lacks full performance information for several of the T. Rowe Price funds.”

The suit seeks “disgorgement of all investment advisory fees paid to T. Rowe Price and/or its subsidiaries from 401(k) Plan assets, as well as the difference in performance between readily available and better performing non-proprietary funds that could have been offered in the 401(k) Plan.” It notes that during the Class Period, 401(k) Plan participants paid TRP Associates in excess of $50 million in fees.