2 years 4 months ago
Since some of these plaintiffs were sales people, making salary and bonuses from selling VOYA investment funds to third parties, maybe they could be considered co-conspirators/defendants too?
Another proprietary fund suit has been filed, with participants in its own plan alleging “self-dealing at the expense of its own workers’ retirement savings.”
In the most recent case David Ravarino, William Kenan Kelly, Holly A. Smith, Jeana Rose Bollinger, Johanna Langille, Laura Shur, Lisa Bishop Lambert, Alan House, Erika Hallberg and Ryan Fuhriman—participants[i] in the $2.2 billion Voya 401(k) Savings Plan—alleged that the plan’s fiduciaries “…selected for the Plan and repeatedly failed to remove or replace a number of deficient proprietary retirement investment funds (“Voya Funds”) managed and offered by Defendant Voya Financial, Inc. (“Voya” or the “Company”) and/or its subsidiaries or affiliates.” The suit further alleges that those funds “…were not selected and retained for the Plan as the result of an impartial or otherwise prudent process, but were instead selected and retained by Defendants because they benefited financially from the inclusion of these options in the Plan,” and that “by choosing and then retaining the Voya Funds as a core part of the Plan’s investments to the exclusion of alternative investments available in the 401(k)-plan marketplace, Defendants enriched themselves at the expense of their own employees.”
The suit (Ravarino v. Voya Fin., Inc., D. Conn., No. 3:21-cv-01658, complaint 12/14/21) goes on to claim that the “defendants also breached their fiduciary duties by failing to consider the prudence of retaining certain other deficient investments that were inappropriate for the Plan during the Relevant Period, and by failing to monitor the Plan’s administrative fees,” and that they “…committed further statutory violations by engaging in conflicted transactions expressly prohibited by ERISA.”
TDF ‘Target’
The suit calls out for special focus the Voya target-date funds—deployed as the plan’s qualified default investment alternative (QDIA)—and the Voya Stable Value Option. “Indeed for almost a decade (since Voya launched them beginning in 2012), the Voya Target Trusts have performed worse than [25%] to [45%] of peer funds,” the plaintiffs allege. Moreover, the suit claims that “…the Voya Target Trusts offered through the Plan are not utilized in any other non-Voya retirement plan in the United States. Further, the performance of the Voya Target Trusts is significantly lacking when compared to such standard target date investments as the Vanguard Target Retirement Trusts.
“As of December 31, 2019, a little over $300 million, or over 15.6% of Plan assets, were invested in the poorly performing Voya Target Trusts. Entrusting a significant portion of the Plan assets (despite the Plan’s considerable market power), to a such a small player in the target date fund market, which also happens to be Plaintiffs’ employer (Voya), and further placing those assets into a target date fund strategy that is not used by any other retirement plan in the country, indicates that the selection and retention of the Voya Target Trusts for the Plan was not the result of Defendants following a prudent process of selecting and monitoring investment options for the plan.”
‘Concentrated’ Argument
They make what would appear to be a unique argument in this type of litigation, cautioning that “according to the Plan filings with the U.S. Securities and Exchange Commission (“SEC”), throughout the Relevant Period, “the Plan’s assets were significantly concentrated in Voya affiliated investments such as Voya mutual funds, Voya collective trusts, and Voya shares...”
Stable, Valued?
As for that stable value offering, the suit challenged the determination of the “crediting rate” for the Voya Stable Value Option, arguing that Voya’s ability to set that rate and the cut of the spread from which Voya “…not only reimburses its own costs for providing the Voya Stable Value Option, but it also charges investment and administrative fees and makes a significant profit thereby for itself and its corporate parent, Voya”… that the contract “effectively enables VRIAC to determine how much interest it will credit, thus giving VRIAC (or VRIAC together with Voya) complete control over how much of the investment yield from the Voya Stable Value Option would inure to the benefit of Plan investors and how much VRIAC would keep for Voya’s own benefit.” All of which the plaintiffs alleged constituted self-dealing.
“Defendants had numerous opportunities during the Relevant Period to remove the Voya Stable Value Option from the Plan and replace it with a lower cost and better performing option from another provider,” the suit notes. “Defendants, however, chose to offer the Voya Stable Value Option anyway in order to create profits for Voya, VRIAC, and Voya Investment Management here, which greatly exceeded any expenses that Defendants actually incurred from offering the Voya Stable Value Option in the Plan.”
As of that weren’t enough, the suit continues that “in addition to maintaining imprudently the Plan’s investments in Voya’s Stable Value Option and Voya Target Trusts, Defendants also failed to conduct appropriate due diligence when they added another proprietary Voya investment, the Voya Small Cap Growth Trust Fund, as a Plan offering and kept that underperforming fund in the Plan during the Relevant Period until 2020, when it was belatedly removed from the Plan’s investment lineup.” Similarly called out for criticism were the plan’s investment in the Voya Real Estate Fund, the Voya Real Estate Fund during the Relevant Period, and the Brown Advisory Small-Cap Growth Equity Portfolio.
‘Bargain’ Based?
As is common in this type legislation, the plaintiffs argue that the plan fiduciaries failed to bargain for better pricing that the “size and bargaining power” should have supported. Ultimately, the suit alleges that “…at all relevant times, there have been many non-Voya-branded, reasonably priced and well-managed retirement investment options in the 401(k) plan marketplace available to the Plan with proven performance track records.” Moreover, they argue that “defendants’ failure is all the more egregious in light of the availability of other non-affiliated investment alternatives with the same investment objectives, that were less risky, less costly, and/or able to present a consistently superior performance record at all relevant times.”
While the suit acknowledges that “an ERISA fiduciary’s use of proprietary investment options in its employee 401(k) plan is not a breach of the duty of prudence or loyalty in and of itself,” they note that “a plan fiduciary’s process for selecting and monitoring proprietary investments is subject to the same duties of loyalty and prudence that apply to the selection and monitoring of other investments.”
They continue that “the relevant investment performance and fee data pertaining to the funds challenged herein, including the Voya Funds, support a strong inference that Defendants failed to follow a prudent process in selecting and then monitoring the menu of investment options for Plaintiffs and other participants who invested in the Plan”—and they comment that the selection and retention of these funds “despite these funds’ poor performance and other deficiencies alleged herein, as well as the availability of superior unaffiliated investments”—indicates that “the Defendants’ decision-making was tainted by the self-serving purpose of promoting and supporting the Company’s own funds and generating self-serving revenue and profits from these funds, regardless of the detrimental impact of that investment strategy on the employees’ retirement savings.”
Bidding Business
Turning to other fees, the suit claims that VRIAC, a Voya subsidiary, has served as the Plan recordkeeper throughout the Relevant Period, and “…on information and belief, Defendants failed to conduct an appropriately competitive bidding process during the Relevant Period to the detriment of Plan participants, in order to, inter alia, maintain the Plan’s administrative services in-house and profit from the direct or indirect fees paid by the participants to the Company, as well as from a host of undisclosed redemption fees, sales commissions, and other similar expenses in connection with transactions associated with the Plan’s investment options.”
The plaintiffs allege there is “no indication that Defendants reached out to any independent administrative services providers to conduct a proper bidding process or engaged in appropriate negotiations with such third parties in connection with the Plan’s administrative services during the Relevant Period”—nor did they (apparently) monitor “…the appropriateness of the redemption fees, sales commissions, and other similar expenses in connection with transactions associated with the Plan’s investment options.”
While these suits have glommed onto a variety of sources to establish what plaintiffs argue are “reasonable” fees this one leans on the 401k Averages Book, noting that—based on data compiled in 2019—the average was “$5 per participant for plans with just 2,000 participants and $200 million in assets (a fraction of the number of participants and assets held by the Plan).” At which point, based on—well, apparently nothing at all—the suit states that “there is no indication here that the Plan receives any administrative services, including recordkeeping services, beyond those that are typically provided by 401(k) service providers to comparable retirement plans” by way of claiming that the fees paid by this $2 billion plan (and 11,000 participants) were unreasonable by comparison (more precisely that “the Plan could have obtained comparable or superior recordkeeping services at a much lower cost.”
‘Know’ How
Now, as is common in this type litigation, the plaintiffs here acknowledge that they “…did not have knowledge of all material facts (including, among other things, the investment option and menu choices of fiduciaries of similar plans, the costs of the Plan’s investments compared to those in similarly sized plans or the availability of superior investment options) necessary to understand that Defendants breached their fiduciary duties and engaged in other unlawful conduct in violation of ERISA, until shortly before this suit was filed”—as a way of setting a starting point on the statute of limitations to bring such actions.
Additionally, by way of establishing the need for discovery, the plaintiffs acknowledge that they “…did not have actual knowledge of the specifics of Defendants’ decision-making processes with respect to the Plan (including Defendants’ processes for selecting, monitoring, evaluating, and removing Plan investments), because this information is solely within the possession of Defendants prior to discovery”—but note that, “for purposes of this Complaint, Plaintiffs have drawn reasonable inferences regarding these processes based upon (among other things) the facts set forth above.”
Will these allegations be sufficient to overcome the inevitable motion to dismiss from the defendants? We shall see…
[i] They’re represented by Scott & Scott LLP and Peiffer Wolf Carr Kane & Conway LLP. The former filed suit against State Street earlier this year (see State Street Slapped With Excessive Fee Suit).
NOTE: In litigation there are always (at least) two sides to every story. However factual it may turn out to be, the initial lawsuit in any action is only one side, and one generally crafted toward a particular result. In our coverage you'll see descriptions of events qualified with statements such as “the suit says,” or “the plaintiffs allege”—and qualifiers should serve as a reminder of that reality.
