Another excessive fee suit settles just ahead of its scheduled trial date.
In the latest such settlement, SEI Investments Co. struck a deal that would resolve allegations that the firm filled its 401(k) plan with expensive and poorly performing funds that earned fees for the company and its affiliates.
Settlement of the case (Stevens v. SEI Invs. Co., E.D. Pa., No. 2:18-cv-04205-NIQA, notice of settlement 5/14/19) pending before Judge Nitza I. Quinones Alejandro in the U.S. District Court for the Eastern District of Pennsylvania comes just seven months after the case was filed and without SEI filing a motion to dismiss. However, details of the settlement won’t be made public until late June (within 45 days of the May 14 notice), according to court filings.
The Claims
Plaintiff Gordon Stevens, a former participant in the SEI Capital Accumulation Plan, filed suit against several plan fiduciaries. The suit (Stevens v. SEI Invs. Co., E.D. Pa., No. 2:18-cv-04205, complaint filed 9/28/18) alleged that SEIC and its Design Committee breached their fiduciary monitoring duties by, among other things:
- failing to monitor and evaluate the performance of the Plan’s fiduciaries or have a system in place for doing so, “standing idly by as the Plan suffered substantial losses as a result of Defendants’ imprudent actions and omissions”;
- failing to monitor its appointees’ fiduciary processes, “which would have alerted a prudent fiduciary to the breaches of fiduciary duties described herein”; and
- failing to remove fiduciaries whose performance was inadequate “in that they continued to maintain investments that a prudent fiduciary would not have retained in the Plan, all to the detriment of the Plan and Plan participants’ retirement savings.”
Interest ‘Ed’
The suit alleged that the defendants “use the Plan to serve their own interests,” offer participants only designated investment options that generate fees for SEIC and its affiliates, and “…treat the Plan as a captive customer of SEI in order to prop up SEI-affiliated investment products and advance SEI’s business objectives.” The plaintiff goes on to state that, “Unfortunately for Plan participants, SEI investment products are not competitive in the marketplace,” and that since the funds didn’t perform well, “there was no reason (other than self-interest) for Defendants to offer solely SEI-affiliated options within the Plan.”
The suit went on to note that “no other defined contribution plan in the country with $250 million in assets or more consists exclusively of SEI-affiliated investment products, and the vast majority of similarly-sized plans do not include any SEI-affiliated investments.” All of which the suit outlines, noting that “given the relative lack of merit of SEI-affiliated investment products, the unpopularity of those products in the fiduciary marketplace, and Defendants’ financial and business conflicts of interest, it is reasonable to infer that Defendants’ process for the selection, monitoring, and retention of Plan investments was deficient and self-serving.”
The suit claimed that defendants offered participants 19 SEI funds and SEIC stock as designated investment alternatives as of the end of 2011, and since then, “Defendants have only added more SEI-affiliated funds, and have not subtracted any options”. It goes on to state that one of those additions – the PIMCO6 Stable Income Fund – “is not branded with the ‘SEI’ name, but SEI is a partner in the management of the fund, and receives fees from the fund.” Indeed, the suit claims that “the continuity of the menu and strict reliance on SEI-affiliated products (despite their low performance rankings) suggests that Defendants have selected and retained SEI-affiliated funds by default, in lieu of conducting an impartial investigation of options available in the marketplace.”
Target ‘Practices’
The plaintiff – who invested in the SEI Target Date 2030 Fund, and through that fund of funds was invested in more than a dozen other SEI-affiliated funds – allegedly “suffered losses as a result of Defendants’ fiduciary breaches, and would have been worth more at the time it was distributed from the Plan had Defendants not violated ERISA as described herein.” The suit claims that when SEI initially launched its proprietary target date funds, the funds were “promptly added to the Plan, despite having no performance records. Since then, they have gained little traction in the marketplace. This has caused SEI to depend on the Plan to prop up the funds.” The suit goes on to explain that the plan has accounted for 27% to 31% of the total assets in SEI’s target date funds since 2012. “An impartial and prudent fiduciary in Defendants’ position would have investigated other options, and would not have retained these proprietary target date funds,” according to the suit.
The plaintiff alleged that SEI “could have obtained higher net returns for participants at comparable levels of risk with alternative target date products, or by exploring a custom target date solution using an experienced target date manager outside of SEI.” But, the suit alleges that the defendants “…have been constrained by SEI’s interest in preserving assets under management, marketability, and revenue associated with the Plan’s investment in proprietary target date funds. Tethering the Plan to proprietary target date funds has resulted in substantial losses to the Plan and participants in the Plan.”
The SEI plan had between $225 million and $420 million in assets during the period in question, according to the suit, and included as many as 3,400 workers.
This is the latest in a long list of financial firms settling such claims, including MFS (terms not yet disclosed), Eaton Vance ($3.45 million), Franklin Templeton ($4.3 million), BB&T ($24 million), Jackson National ($4.5 million), Deutsche Bank ($21.9 million), American Airlines Group Inc. ($22 million), Allianz SE ($12 million) and TIAA ($5 million).
