Proprietary Fund Suit Alleges ‘Baked-in’ Bias

A new lawsuit claims that “company bias” has been “baked into” its system of fund review, resulting in higher fees, “all to the detriment of the Plan’s participants.”

The suit, Beach v. JPMorgan Chase Bank (S.D.N.Y., No. 1:17-cv-00563), was filed Jan. 25 in the U.S. District Court for the Southern District of New York by Plaintiff Terre Beach on behalf of similarly situated participants in the JPMorgan Chase 401(k) Savings Plan. She alleges that the plan fiduciaries (the listing of the defendants consumes a fair amount of the 60-page filing, notwithstanding a reference to additional “John Doe” defendants) failed to “use their expertise and the Plan’s bargaining power” to secure lower fees on the investment options in the plan.

Specifically, the suit accuses the plaintiffs of:

  • Failing to adequately review the investment portfolio of the plan to ensure that each investment option was prudent, both in cost and performance and without regard to the option’s affiliation with JPMorgan Chase.
  • Retaining proprietary mutual funds, from the bank and its affiliated companies, within the plan despite the availability of nearly identical lower cost and better performing investment options.
  • Failing to affect a reduction in fees on 20 different investment options at an earlier date, most of them proprietary funds.
  • Failing to offer commingled accounts, separate accounts, or collective trusts in lieu of the proprietary mutual funds in the plan, despite their far lower fees.

In a second count, plaintiffs also accused “certain of the Defendants” of breaching their fiduciary duties by “failing to adequately monitor other persons to whom management/administration of Plan assets was delegated, despite the fact that such Defendants knew or should have known that such other fiduciaries were failing to manage the Plan and its investment portfolio in a prudent and loyal manner as required by ERISA.”

‘Flooding of the Plan’

As other of these excessive fee suits have done, this one takes issue with the choice of active versus passive alternatives, but it was the prevalence of proprietary funds (“from years 2010 through 2015, approximately half of all the possible investment options were proprietary investment vehicles managed by the Bank or by another subsidiary of JPMorgan Chase,” according to the suit) and the alleged complicity of their arrangement with BlackRock (which managed seven of the funds in the plan, in addition to the target-date funds, which the suit says were mostly index funds managed by BlackRock).

According to the suit, “at all times during the Class Period, approximately 72% of the Plan’s portfolio was being managed either by a JPMorgan Chase affiliate or with companies such as BlackRock who maintain lucrative business arrangements with JPMorgan Chase and its affiliates.” The suit claims that the “flooding of the Plan with BlackRock investment options is the result of a business arrangement between BlackRock and JPMorgan Chase and/or its affiliates, whereby in return for access to the Plan, BlackRock shared management or performance fees to the Bank and/or an affiliate.”

And, as has happened in other, similar litigation, improvements made by the plan fiduciaries were cited in the suit to establish that those better results could have been achieved sooner (including the movement from a mutual fund format to a separate account).

Plaintiff Beach was invested in the plan’s Target Date 2020 Fund, and through that investment was also invested in BlackRock index funds offered within the plan, but the suit claims that she “did not have knowledge of all material facts (including, among other things, the cost of the investments in the Plan relative to alternative investments that were available to the Plan but not offered by the Plan) 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.”

Moreover, she notes that she “did not have and does not have actual knowledge of the specifics of Defendants’ decision-making processes with respect to the Plan, including Defendants’ processes for selecting, monitoring, and removing Plan investments, because this information is solely within the possession of Defendants prior to discovery.”

That said, for purposes of the complaint, she claims to have drawn “reasonable inferences regarding these processes based upon (among other things) the facts set forth herein.”

All in all, the suit claims that “the failure of the Plan’s fiduciaries to review the portfolio, conduct a reasonable investigation of alternatives, and act upon this information sooner cost Plan participants millions in unnecessary fees.”

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