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Suit Challenges Fund Choice, Review

ERISA

Participants have accused plan fiduciaries of “stuffing cash into a mattress” while at the same time forcing participants “to play the fool’s game” by offering only “high-cost actively managed funds.”

Plaintiffs Gloria G. Ferguson and Cassandra McClinton “individually and as representative of a class of participants in and beneficiaries of the Compass SmartInvestor 401(k) Plan” have brought suit (Ferguson v. BBVA Compass, N.D. Ala., No. 2:19-cv-01135-SGC, complaint 7/18/19) against the BBVA plan fiduciaries for breach of fiduciary duty under the Employee Retirement Income Security Act of 1974. More specifically, “mismanaging a $100 million money market fund that was the investment equivalent of stuffing cash into a mattress” (invoking a quote from the case Brotherston v. Putnam Investments, LLC, which might ultimately find its way to the Supreme Court, that said: “…a trustee who decides to stuff cash in a mattress cannot assure that there is no loss merely by holding onto the mattress”). 

Even more specifically, “[F]ailing to properly monitor investments and remove imprudent ones, including high-cost mutual funds whose performance did not justify their increased costs.” BBVA USA is a bank holding company headquartered in Birmingham, AL, a subsidiary of the Spanish multinational Banco Bilbao Vizcaya Argentaria since 2007. It operates chiefly in Alabama, Arizona, California, Colorado, Florida, New Mexico and Texas.

Big Plan ‘Power’

This suit claims – as have most (all?) of the so-called excessive fee suits – that large plans (the $931 million BBVA plan covers 13,000 employees) – “have ready access to high-quality administrative and investment management services from reputable providers at a reasonable cost,” and thus “a trustee cannot ignore the power the trust wields to obtain favorable investment products, particularly when those products are substantially identical – other than their lower cost – to products the trustee has already selected.”

But the real issue for these plaintiffs seems to be returns (though perhaps it’s more accurate to say “net returns,” since they later note that “the performance of an ERISA plan’s investment options must be evaluated net of costs,” and that, “Wasting beneficiaries’ money is imprudent”), alleging that BBVA has a duty “both of impartiality and to “produce income that is reasonably appropriate to the purposes of the trust and to the diverse present and future interests of its beneficiaries” (though on the latter point, they turn to the Restatement (Third) of Trust § 79, rather than ERISA. And they allege that “BBVA has an affirmative obligation to generate income from trust assets,” and that “the Plan may not hoard cash in the name of capital preservation.”

The ‘I’ in ERISA

Creatively making their point, the suit notes that “the letter ‘I’ in ERISA refers to ‘Income.’ Trustees have an obligation to generate income from trust assets.”

And as it turns out, they allege that some $100 million of that $931 million was invested in a Vanguard money market fund, and they attribute this to the lack of options available to participants who, they claim, “lacking sufficient short-term bond fund options, were forced to place their retirement savings in the BBVA Plan’s mattress.”

The plaintiffs claim that “BBVA failed to have a process, or failed to adhere to such process, to monitor the Plan's investment menu and failed to recognize its duty to offer sufficient income producing bond options during a period of time when money market returns were near zero.” More specifically, they note that the duration of the Vanguard Money Market Fund was about 40 days, “making it suitable for use as the retirement plan equivalent of a checking account.” The suit goes on to note that, for the six years preceding the filing of this lawsuit, “the Plan’s money market funds returned 0.01% or less per year, close to nothing. Indeed, accounting for inflation, participants invested in these options actually lost money.

“A diligent plan sponsor, upon reviewing the Plan’s investment menu, would immediately have understood the reason for participants’ behavior: the Plan did not have an adequate menu of income producing bond options. BBVA did not have to scour the market place for additional options, there were any number of high quality bond funds, stable value funds, and total return funds available, from any number of reputable providers.

“BBVA, as a banking institution with intimate familiarity with short-term interest rates knew, or should have known, without the benefit of hindsight, that this was occurring. The magnitude of the loss is readily apparent. A fiduciary with a prudent process would not have allowed this to happen.” The loss incurred as a result – comparing the money market option to either short-term bond or stable value fund choices – was $7.79 million, according to the plaintiffs.

‘A Fool’s Game’

The issues weren’t just returns, of course – and the plaintiffs here, as have plaintiffs in similar litigation, raised the issue of not only fees, but also the relative costs of active versus passive indexed investments. The suit notes that, “A fiduciary seeking to implement an active strategy has a difficult task,” because while they have “…ready access to cost and performance information in the mutual fund prospectus, but great difficulty in identifying an actively managed fund whose high-costs are actually justified by skill in generating excess returns. Then, even if the fiduciary truly has found a manager with a ‘hot hand,’ the fiduciary must monitor the performance of the fund at regular intervals to make sure that the manager’s streak does not run cold. Otherwise, the plan can be left with a menu of high-fee funds that consistently underperform the market, the worst of all possible outcomes.”

As for the BBVA plan, the plaintiffs claim that “BBVA could have chosen safe investments such as low-fee index funds or even low-fee index funds with high-fee actively managed alternative,” but “…chose instead to play the much riskier game of maintaining an investment menu that used only high-fee actively managed funds for most asset classes of investments. BBVA’s investment menu was comprised of target date funds, a constellation of high-fee actively managed funds covering each of the major asset classes, and a single low-fee index fund covering the S&P 500 asset class.”

On average, the plaintiffs claim, “BBVA’s investment menu was more than four times the cost of a menu of comparable low-cost index funds from a reputable provider.”

Now, the plaintiffs admit that “ERISA did not prohibit BBVA from selecting high-cost funds that sought to generate excess returns,” but – again citing the Restatement (Third) of Trusts § 90 – allege that “ERISA’s prudent investor standard absolutely required BBVA to monitor the performance of these funds net of costs and to remove funds that failed to demonstrate the ability to generate excess returns.” They allege that “BBVA forced participants to play the ‘fool’s game’ by offering only high-cost actively-managed funds,” but that “a plan sponsor such as BBVA that has deliberately chosen such a high-risk, excess return strategy owed participants the highest duty of competence, skill, loyalty, and caution in monitoring these investments and in timely removing high-cost investments that fail to achieve their investment objectives.”

Performance Gaps?

“The problem with the selection and retention of the funds[1] by BBVA was not just that they were expensive,” the plaintiffs claim, “but that the expenses were not justified based on their performance. Though ERISA does not establish bright line rules, it is difficult to imagine any circumstance in which a fiduciary with a prudent process would force plan participants seeking equity exposure to invest in high-costs funds that consistently missed their benchmarks as BBVA here.”

As for the impact of those decisions; the plaintiffs claims that, “after six years, the result – lost appreciation of some 25% – is dramatic. BBVA wasted over $40 million of Plan participants’ retirement money chasing excess returns.” More precisely, $47 million, and they argue that on a risk-adjusted basis, the gap is even larger.

Wiggins Childs Pantazis Fisher & Goldfarb LLC, James White Firm LLC, and Law Office of Lange Clark PC represent the plaintiffs (and proposed class).

Footnote

  1. In case you’re curious, the plaintiffs claim that “the specific underperforming funds that BBVA selected, then failed to adequately monitor, included the following funds: Aston/TAMRO Small Cap I; Principal Mid-Cap Value; the ten Principal Target Date Funds; Invesco International Growth Fund; and, Thornburg International Value Fund.”

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