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Salesforce Fiduciaries Slapped With 401(k) Excessive Fee Suit

Litigation

Another multibillion-dollar 401(k) plan has been sued for its “Defendants’ failure to investigate lower cost alternative investments (both actively and passively managed funds)”—and is accused of being influenced by investment managers’ ownership in the firm.

This time the target is Salesforce—and while the allegations (Davis et al. v. Salesforce.com Inc. et al., case number 3:20-cv-01753, in the U.S. District Court for the Northern District of California) echo those made in numerous other excessive fee litigations—the use of active funds when passive alternatives were available (in 2018, 19 out of 25 core investments, or almost 80% (not including money markets and investments available through brokerage link), were actively managed), and the use of mutual fund classes that were not the least expensive. Those factors combined such that, according to plaintiffs Tim Davis, Gregor Miguel, and Amanda Bredlow that “during the Class Period, the Plan lost millions of dollars in offering investment options that had similar or identical characteristics to other lower-priced investment options.” The plan reportedly had just over $2 billion in assets for some 25,849 participants as of Dec. 31, 2018. 

Indeed, the suit claims that, “taking 2018 as an example year, almost half of the Plan’s core investments (including all but one of the target date funds) were much more expensive than comparable investments found in similarly-sized plans,” and that “the expense ratios for these funds were in some cases up to 135% (in the case of the Fidelity Contra Class K) above the median expense ratios in the same category.”

Conflicts of Investment? 

Speaking of which, while conflicts of interest have often been alleged in these cases, the plaintiffs here introduced a new twist. Specifically, noting that “of particular importance to this case, Salesforce is a publicly traded Company,” the suit notes that Fidelity Investments, Inc. owned over 94 million shares of Salesforce as of September 30, 2019, and that “FMR’s affiliates, including Fidelity Retirement Services, served as the Plan’s recordkeeper and investment manager of some of the Plan’s investments. The plaintiffs also point out that Fidelity Contrafund was the largest mutual fund investment in Salesforce with 27.1 million shares, and that the fund has 2.55% of assets invested in Salesforce (3.70% of the firm’s outstanding shares). The suit describes this as “significant because at over $159 million of assets under management, the Contrafund is the largest single actively managed nontarget date investment in the Plan by far.”

The plaintiffs also point out that JPMorgan Chase (another investment manager of the plan) owned over 13 million shares of Salesforce and is the 8th largest owner of Salesforce shares as of Dec. 31, 2019. “Having the Plan’s investment managers own a portion of the Company created an indisputable conflict of interest for the Plan’s fiduciaries,” they claim, asserting that, “…. this relationship prevented the Plan’s fiduciaries from (1) critically reviewing the fees or performance of the Fidelity and JPMorgan Chase branded investments that are the subject of this lawsuit, and (2) making decisions with an ‘eye single’ to the interests of plan participants.”

“At all times during the Class Period, Defendants knew or should have known of the existence of cheaper share classes and therefore also should have immediately identified the prudence of transferring the Plan’s funds into these alternative investments,” according to the suit.

Wholesale Changes

The plaintiffs acknowledge that, “in 2019, five years into the Class Period, wholesale changes were made to the Plan wherein certain Plan investment options, some of which are the subject of this lawsuit, were converted to lower class shares,” but go on to note that “these changes were far too little and too late as the damages suffered by Plan participants to that point had already been baked in. There is no reason to not have implemented these changes by the start of the Class Period when the majority of lower-class shares were available. Moreover, these changes may not have cured the Company’s fiduciary breaches because the circumstances under which changes were made have not been disclosed to Plaintiffs.”

The suit also names, though not as a party to the suit, Bridgebay Financial, Inc., which was hired to “support[] the Committee through the provision of independent, third party research and analysis.” It goes on to note that while “Bridgebay is a relevant party and likely to have information relevant to this action, it is not named as a defendant given that the Committee remains responsible for the overall selection and monitoring of all investment options,” but they “…reserve the right to name Bridgebay as a defendant in the future if deemed necessary.”

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