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Takeover Target Targeted in (Another) Excessive Fee Suit


An excessive fee suit involving proprietary funds claims that fiduciary breaches not only undermined participant retirement security but played a role in a recordkeeping acquisition.

The plaintiff suing here[i] is Judy Lalonde, a participant in the MassMutual Thrift Plan. The suit claims that the fiduciary defendants violated ERISA’s fiduciary duties under 29 U.S.C. § 1104 and its prohibitions on self-dealing under 29 U.S.C. § 1106 by “managing the Plan and its assets through a process that favored the economic interests of Massachusetts Mutual Life Insurance Company over those of Plan participants and beneficiaries.” The suit further alleges that this “flawed process resulted in a series of outcomes that caused the Plan and its participants and beneficiaries to sacrifice retirement savings to poor performance and swollen costs which inured to the benefit of MassMutual’s bottom line.”

General Allegations

More specifically the suit (Lalonde v. Mass. Mut. Life Ins. Co., D. Mass., No. 3:22-cv-30147, complaint 11/9/22) alleges that the defendants:

(1) retained a series of excessively expensive and poorly performing proprietary mutual funds that are rarely, if ever, selected by objective and non-conflicted fiduciaries of large retirement plans like the MassMutual Plan;

(2) failed ensure that the Plan held the least expensive share class and/or investment vehicle for the investment strategies Defendants selected for the MassMutual Plan;

(3) caused the MassMutual Plan to transfer a substantial portion of its assets into MassMutual’s general account in connection with the Plan’s stable value investment, granting the Company a bounty to use for its business, without adequately compensating the Plan for the risk this imposed on the Plan or considering alternative stable value products with better terms; and

(4) caused the MassMutual Plan use pay MassMutual unreasonable recordkeeping fees while attempting to off-load that business line to Empower.

All this the suit claims resulted in the loss of “tens of millions of dollars in retirement savings through poor performance and above-average expenses (for which MassMutual was usually the benefactor).”  The suit goes on to state that “notably, in the past few years, the Company brought in well over $50 million in compensation directly from the Plan’s investment in its proprietary products, all while using the Plan as an anchor client to support its marketability and corporate initiatives, like the sale of the Company’s retirement business to Empower for $2.35 billion.”

Previous Litigation

Now, this suit makes many of the claims raised in other excessive fee and proprietary fund suits. This one—perhaps to cast the fiduciary defendants in a bad light, but also to provide a buffer defense against a potential motion to dismiss—mention that in 2013, “participants in this same plan filed a class action lawsuit against various MassMutual-affiliated defendants,” where the plaintiffs in THAT suit (also) “alleged that the defendants placed MassMutual’s interests above plan participants’ interests in violation of ERISA’s duty of loyalty.” A case that, in November 2016 was settled for $30.9 million, along with an agreement that going forward plan participants were charged no more than $35 per participant  for standard recordkeeping services. “The claims in this case are limited to the period after the Settlement Effective Date in the prior suit. The release of claims in the Settlement Agreement therefore does not apply,” they note.

Group Annuity ‘Gripes’

A big sticking point for the plaintiff here was the “use of MassMutual’s Group Annuity Contract for Self-Interested Business Reasons”—a practice they claim was “uncommon for mega-sized retirement plans—those holding assets of $1 billion or more—to offer investment options through a MassMutual Group Annuity Contract.” Instead, the plaintiff claims that in June 2020, MassMutual reported that the average plan serviced by its retirement plan business held $6.4 million in assets and had 96 participants—whereas the MassMutual plan held more than $3.8 billion at that time. The suit claims that larger plans can “procure better terms on their own than through a MassMutual group annuity contract, which is designed to serve the needs of smaller plans with less bargaining power.” Thus, they claim the rationale was to benefit MassMutual, rather than the plan participants/beneficiaries.

More insidiously, the suit argues that the large plan being so invested “significantly increased MassMutual’s assets under management (‘AUM’), which was beneficial to MassMutual for marketing and other business reasons”—including the aforementioned sale of that business to Empower Retirement. “Had Defendants divested from the MassMutual GAC and moved the Plan into an unaffiliated structure more typical for mega plans, MassMutual’s efforts to sell its retirement plan business would have been impaired because the Plan’s exit would have caused a significant outflow of assets.”

‘Alternative’ Arguments

The suit cites several instances where they allege the plan could have invested in the same funds/strategies directly (and without a management fee “scrape” to MassMutual), rather than via the MassMutual funds, where those managers served as subadvisors. The availability of collective investment trust (CIT) alternatives was cited here, as it has been in other, similar cases. Ultimately, the suit argues that, “Had Defendants conducted a prudent and objective review of the Plan’s investment options, untainted by self-interest, they would have found numerous alternatives to the MM Funds that offered materially-identical investment strategies at lower cost.” 

Beyond that, the suit alleges not only that the MM Funds had “high costs and historically poor performance,” that they “have not found wide acceptance in the market among plans of similar size,” but that “the Plan’s investment represents a substantial portion of the MM Funds’ total assets under management.” Indeed, the suit states that of the 10 actively managed MM Funds that remained in the Plan as of year-end 2021, “the Plan’s stake represented more than 5% of the total assets of all but one fund, and as much as 25% or even 30% in some cases.” The suit also claims that “in 2020 alone, over $7 million in compensation was paid to MassMutual and/or its affiliates because of the Plan’s investment in the MM Funds”—which the suit extrapolates to compensation of approximately $40 million from the  Plan’s investment in the MM  Funds alone during the Class Period—not to mention that it provided “an anchor for the funds that enabled MassMutual to create the illusion of wider market acceptance.”

But the suit doesn’t limit its charges to proprietary offerings—claiming that the Plan had sufficient assets to qualify for the CIT version of the Plan’s current target date suite, as well as qualifying for lower cost share classes of the funds it chose.

The suit also takes up for high cost/inferior performance “a proprietary investment called the MassMutual Guaranteed Investment Account,” the Plan’s largest holding and the only stable value offering. The suit states that not only does MassMutual benefit from investment in the firm’s general account, but that—as it sets the crediting rate and determines the spread[ii]—it was an “unreasonable” expense “as the consideration that MassMutual retained in connection with Plan assets invested in the MM GIA exceeded an adequate amount.” 

Recordkeeping ‘Record’

The suit goes on to assert that from the start of the Class Period until Jan. 1, 2021, MassMutual’s Workplace Solutions—a division of its retirement business—served as the Plan’s recordkeeper and provided recordkeeping services to the Plan—and was, according to the suit, “directly compensated for these services at an average rate of $46 per participant per year and withdrew this compensation from participants’ accounts in the Plan.” On Jan. 1, 2001, Empower Retirement became the Plan’s recordkeeper as a result of MassMutual selling its retirement business to Empower—and the suit claims that “on information and belief, the sale price was tied to the amount of assets being acquired (including the Plan’s assets)”—and that “Empower was directly compensated for the recordkeeping services it provided at an average rate of $40 per participant per year, and was paid this compensation from participants’ accounts in the Plan.”

Then in May 2022, the suit states that MassMutual announced that it was dropping Empower as recordkeeper for the Plan and replacing it with Fidelity—following the issuance of a request for proposal. Not that the plaintiff sees this as a good thing—stating that the defendants “decided to issue an RFP and select a new recordkeeper only after the compensation for recordkeeper services would no longer go to MassMutual and after MassMutual had been compensated by Empower for selling its recordkeeping business to Empower.” The suit claims that Fidelity agreed to provide recordkeeping services to the Plan for $33 per participant per year, while maintaining at least the same level of service—and that “there is no reason that Defendants could not have procured recordkeeping services for a similar or lower rate before 2022.” Moreover, the suit—citing another excessive fee suit involving Fidelity—claims that an even lower fee could have been negotiated.

Sum ‘Stance’

So, to sum up, the plaintiff here says that a series of facts “support an inference of a broken and conflicted fiduciary process,” specifically that:

  • the Plan is the subject of an ongoing DOL investigation;
  • the Plan also was the subject of a prior lawsuit alleging shortcomings in Defendants’ fiduciary processes and improper self-dealing;
  • defendants only removed the Plan’s proprietary index funds in the wake of the prior lawsuit, and “gave a pass to the Plan’s actively-managed proprietary funds that generated higher fees for MassMutual”;
  • defendants failed to meet the recordkeeping expense benchmark set forth in the settlement of the prior lawsuit; and
  • defendants did not conduct an RFP for recordkeeping services until 2022, “after MassMutual no longer had a financial stake in the recordkeeping services provided to the Plan.”

Oh—and as if that weren’t enough, the suit claims that “it is reasonable to draw an adverse inference from the fact that neither Defendants not the Plan Administrator have provided Plaintiff with requested documentation relating to the Plan pursuant to her duly-issued request for Plan documents pursuant to 29 U.S.C. § 1024. This information should have been provided as required by law, and presumably would have been provided if Defendants had nothing to conceal.”

Will the court agree? Stay tuned.


[i] She is represented by Cohen Milstein Sellers & Toll PLLC.

[ii] This has been raised in other cases regarding stable value investments.