Edward Jones has found itself the target of a second 401(k) participant suit which alleges that the brokerage firm’s plan fiduciaries breached their duties in a number of ways.
The suit, filed in the U.S. District Court of the Eastern District of Missouri by two former Edward Jones plan participants, claims that the fiduciaries breached their duties owed to plaintiffs and to the other participants and beneficiaries of the plan by, among other things:
- selecting and maintaining the investment options of fund companies with whom Edward Jones maintained revenue sharing and/or other arrangements;
- failing to use their expertise and the plan’s bargaining power, as a result of what the suit termed its “massive assets” (valued between $2.28 and $4.17 billion during the class period), to secure lower fees on the investment options in the plan;
- selecting and maintaining the higher fee share classes of identical funds;
- Offering a money market account with a high fee and significantly lower performance than a low fee stable value fund; and
- including and maintaining an unreasonable number of high risk investment options all of which “cost Plan participants millions of dollars and run directly counter to the express purpose of ERISA plans, which are designed to help provide funds for participants’ retirement.”
Flooding the Plan
As to the last point, the suit claims that plaintiffs “flooded the Plan with aggressive, high-risk investment options that they knew would be unreasonable for the purposes of ERISA and the Plan,” and because “as sophisticated financial planners, they were aware that actively managed options tended not to outperform the market over the longer term enough to justify their higher investment management costs.” Moreover, the suit alleges that these active portfolios were “stuffed with international and large cap options, making them inappropriate for purposes of ERISA.” As a result of what the suit terms “menu-stuffing,” plan participants were forced to select funds at unduly high fees in arrangements that ultimately benefited Edward Jones and its owner, Jones Financial.
The suit also alleges that the plan fiduciaries failed to adequately monitor other persons to whom management/administration of plan assets was delegated, “despite the fact that Edward Jones knew or should have known that such other fiduciaries were imprudently allowing the Plan to select and continue to offer Plan participants the higher fee share class options of the identical funds, maintain a poor performing and high fee money market account (elsewhere in the claim, plaintiffs alleged that it ‘has had negative returns for every year it has been part of the Plan’); and have selected, and select and maintain risky investment options.”
The suit claims that Edward Jones used the “captive market” of their own 401(k) plan, “in which the menu of investment options was totally controlled by Edward Jones and its employees appointed to the Investment Committee” – an arrangement that plaintiffs said would “guarantee” that Edward Jones’ business partners received investment management fees from plan participants, “who would have few options but to investment in the mutual funds of Edward Jones’ business partners.”
Limited Choices
As for the question of participant choice, the suit notes that, had plan participants not wanted to invest in the product partners’ funds, they would have been limited to four investment options in 2011 and eight investment options in 2015. The plan ended 2010 with $2,288,050,093 in total assets, of which $2,269,544,690, or approximately 99.2%, were invested in the product partners’ funds or Edward Jones’ proprietary funds. The suit notes that in 2010, the default investment for plan participants was one of the Edward Jones proprietary funds, “ensuring that at the very least, the most unsophisticated Plan participants would be paying fees to Edward Jones Product Partners and/or business partners.”
The allegations in this most recent suit largely mirror those made in a suit filed in August against the firm.
The case is Schultz v. Edward D. Jones & Co. L.P., E.D. Mo., No. 4:16-cv-01762, complaint filed 11/11/16.
