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Suit Claims Conflict in Investment Advisor Fund Pick

A new lawsuit alleges that a plan sponsor and its fiduciary investment consultant fell short of their ERISA obligations in adding a fund to the menu.

Plaintiff Benjamin Reetz seeking to represent participants in the $5.2 billion Lowe’s 401(k) plan against Lowe’s and Aon Hewitt Investment Consulting, Inc. (who served as the plan’s fiduciary investment consultant) for breach of their fiduciary duties under ERISA for what he alleges was an imprudent selection and retention of the Hewitt Growth Fund for the plan.

The suit alleges that that fund was retained despite what the suit claims that:

  • the Hewitt Growth Fund was a new and largely untested fund at the time it was added to the plan;

  • the Hewitt Growth Fund was underperforming its benchmark at the time it was added to the plan and continued to underperform after it was added to the plan; and

  • the Hewitt Growth Fund was not utilized by fiduciaries of any similarly-sized plans and was generally unpopular in the marketplace.

Swap ‘Mete’

The suit goes on to note that, to make matters worse, the defendants placed over $1 billion of the plan’s assets into “this new, underperforming, and unpopular fund, and disturbed participants’ investment choices by transferring assets from eight existing funds[1. In case you were wondering, the eight funds removed were Vanguard Institutional Index Fund, T. Rowe Price Institutional Mid-Cap Equity Growth Fund, American Funds New Economy Fund, Eagle Small Cap Growth Fund, T. Rowe Price Small-Cap Value Fund, American Funds EuroPacific Growth Fund, Diamond Hill Value Account, and T. Rowe Price Mid-Cap Value Fund Account.] in the Plan (which were generally performing well) and putting them in the Hewitt Growth Fund, which replaced these existing funds in the Plan’s investment lineup.”

Before this $1 billion investment, the suit claims that the Hewitt Growth Fund had “struggled to attract capital from other investors,” having garnered only $350 million in total assets, “such that the Plan’s investment resulted in a four-fold increase in the size of this fund.” Furthermore, the suit claims that Hewitt had a conflict of interest in recommending this proprietary fund for the plan, and “improperly did so to further its own financial interests instead of the interests of the Plan’s participants.” Moreover, they allege that Lowe’s “should have recognized this conflict of interest, and should have recognized (as other 401(k) plan fiduciaries did) that the Hewitt Growth Fund was inappropriate for the Plan,” and that by causing the plan “to include and retain this fund, Defendants breached their fiduciary duties under Section 404 of ERISA (29 U.S.C. § 1104) and caused the Plan to suffer millions of dollars in investment losses.” And if that weren’t enough, the plaintiff argues that, “in addition to breaching its fiduciary duties, Lowe’s also breached its duty to monitor Hewitt.”

CIT ‘Suite’

The suit notes the 2010 merger of three previously unaffiliated firms: EnnisKnupp, Hewitt Associates and Aon Investment Consulting, that following the merger Hewitt “aggressively pursued new product development, in an effort to expand its business,” and that among the products that Hewitt developed was a set of proprietary collective investment trusts that “were an entirely new venture for Hewitt, as it had never previously developed its own set of funds for defined contribution plans and historically had limited its role to advising clients regarding funds offered by other companies.”

The suit claims that Hewitt attempted to leverage its existing consulting client base to attract investors, but that the “overwhelming majority” of 401(k) plan sponsors that it advised “did not fall for the sales pitch, and rejected Hewitt Funds for their plans through their own fiduciary screening process.” Lowe’s, according to the suit was “not as discerning,” and began offering three Hewitt Funds in the Plan in 2015 (the Hewitt Growth Fund, Hewitt Income Fund, and Hewitt Inflation Fund).

Of those three funds, Lowe’s, according to the plaintiff, “placed their biggest bet on the Hewitt Growth Fund by far,” specifically replacing eight existing funds in the plan with that option, and simultaneously transferred all of the plan’s assets in those existing funds (over $1 billion in total) into the Growth Fund – putting approximately half of the plan’s total asset base in pooled investment vehicles (i.e., assets other than Lowe’s Corp. stock). “No other single fund in the Plan was entrusted with remotely the same amount of assets as the Hewitt Growth Fund,” they claim.

Calling the decision to do so “a large gamble,” and stating that it was “extraordinarily irresponsible” to do so, the plaintiff noted that at the point of making that move the Hewitt Growth Fund had less than two years of performance history. Moreover, the suit notes that, at that time, “the limited performance data that was available for the Growth Fund was anything but encouraging. In fact, at the time the Growth Fund was added to the Plan, it reported negative returns (-0.67%) from its inception in Q4 2013 through Q3 2015. By contrast, over the same period, the eight funds it replaced had a weighted average return of 7.30%.”

At the time the Growth Fund was added to the Ppan in 2015, the plaintiff alleges that it was included in only two other retirement plans in the entire country, “and was not included in any similarly-sized retirement plans with at least $1 billion in total assets.” They further allege that since then, the fund has “continued to perform poorly,” so poorly that the plan has registered more than $100 million in losses.

The plaintiff brings this action under ERISA to “remedy these fiduciary breaches, recover the Plan’s losses, disgorge the profits that Hewitt received on account of its disloyal conduct, prevent further mismanagement of the Plan, and obtain other appropriate relief.”

Among the pooled investments, the amount invested in the Hewitt Growth Fund as of year-end 2016 was $1,082,100,276 – according to the suit, more than six times the amount invested in the next largest fund ($177,093,609), a target date fund from Vanguard.

Plaintiff Reetz is a current participant in the plan, has been a participant throughout the proposed class period, and all of his plan assets are invested in the Hewitt Growth Fund.

The lawsuit (Reetz v. Lowe’s Cos., W.D.N.C., No. 5:18-cv-00075-RJC-DCK, complaint 4/27/18) was filed in the U.S. District Court for the Western District of North Carolina by Nichols Kaster PLLP and Tharrington Smith LLP.