401(k) Excessive Fee Suit Alleges Issues with ETFs, TDFs, and Menu Size

Another provider has been sued by an employee-participant in its own 401(k) plan, not just for its inclusion of proprietary funds, but the type and number of options on its menu – and its target-date strategy.

The suit, filed by participant-plaintiff Diego Cervantes in the U.S. District Court for the Northern District of Georgia (Diego Cervantes v. Invesco Holding Co. (US) Inc. et al., case number 1:18-cv-02551), alleged a number of issues against Invesco that have been raised in similar lawsuits: that defendants failed to use their leverage as a large plan to reduce costs for the benefit of plan participants, and that they offered inferior performing proprietary retail shares (which benefited the sponsoring company) rather than better performing institutional class shares.

‘Dumping’ Grounds

In what seems to be the first time the issue has been raised in 401(k) plan litigation, the suit notes that even though the typical 401(k) plan offers between 10 to 15 investments, the Invesco plan had approximately 150 to 205 options during the Class Period. The plaintiffs imply that this was the result of the defendants “indiscriminately dumping Invesco mutual funds, ETFs, and other investment products into the Plan in breach of their fiduciary duties,” and that the “large number of options made their selection by Plan participants confusing, especially since the Plan offered multiple share classes (with different fees and performance results) of numerous funds.”

But it wasn’t only a matter of too many choices; the suit says that another problem was that plan participants were “severely limited” to selecting between mostly Invesco-affiliated investment products (about 95% of the roughly 200 options were affiliated with Invesco, according to the suit. All in all, the suit claims that the defendants “effectively treated Plan participants as a captive market and testing ground for the Company’s investment products” and sought to use Plan assets to generate fees and boost assets under management for Invesco’s investment management business.

If that weren’t enough, the plaintiff also noted that several of the plan investment options “exposed Plan participants to an undisclosed liquidity risk” as a result of their investments in the Invesco Short Term Investment Fund (ISTF), which the suit notes was “fined $10 million by the U.S. Department of Labor for inappropriately using fund assets to artificially inflate the net asset value of that fund.”

The defendants were taken to task not only for relying on proprietary funds, and more expensive retail versions of those funds, but for not using collective investment trusts – and, in another unique twist, “dumping” a large percentage of affiliated ETFs into the Plan. The suit notes that during 2016, the Plan offered nearly 100 Invesco ETFs, sponsored by Defendant PowerShares, approximately 65% of Invesco’s entire ETF portfolio as of Sept. 30, 2017.

Target Ranges

The suit also challenged the target-date fund approach embraced by Invesco. The suit notes that Invesco launched a series of target-date mutual funds in 2007 but didn’t offer them to participants until 2015 – and then offered “retail shares of a single target date fund, the Invesco Balanced Risk Retirement Fund.” Worse, those “expensive retail shares” were only for 2020 and 2050 – and the suit charges that “the Plan fiduciaries breached their fiduciary duties by failing to offer target date funds for people who are scheduled to retire at times other than 2020 or 2050.”

In sum, among other things, the suit seeks:

  • A declaration that each of the Defendants who are fiduciaries of the Plan have breached their fiduciary duties under ERISA
  • An order that each fiduciary found to have breached his/her/its fiduciary duties to the Plan to jointly and severally restore all losses to the Plan that resulted from the breaches of fiduciary duty, or the disgorgement of profit made by any defendant
  • Requiring that the Plan divest itself of investments in the imprudent Investment Options
  • The removal of any breaching fiduciaries as fiduciaries of the plan and permanently enjoining them from serving as a fiduciary of any ERISA-covered plan in which Plaintiff or any member of the Class is a participant or beneficiary
  • The appointment of an independent fiduciary, at the expense of the breaching fiduciaries, to administer the Plan and the management of the Plan’s investments and/or selection of investment options and/or to oversee the divestment of the Plan’s investments
  • A full accounting of all fees paid, directly or indirectly, by the Plan
  • Attorneys’ fees and costs

Will they prevail? Time will tell.

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