Transamerica Served with 2nd Proprietary Fund Suit

As 2018 wound to a close, another provider was sued by another group of participants, not only for the use of certain proprietary funds, but for use of an asset allocation tool they claim exacerbated the problem.

Plaintiffs Jeremy Karg, Matthew R. LaMarche and Shirley Rhodes (individually and as representatives of a class of similarly situated persons) in Transamerica Corporation’s $1.9 billion, 17,000 participant 401(k) Plan between Dec. 28, 2012 and the date of final judgment in this action have filed suit against the plan’s fiduciaries.

The suit, filed in the U.S. District Court for the Northern District of Iowa, alleges that, “participants trusted Transamerica to construct a 401(k) plan that offered superior investment options and world-class investment management. Yet Transamerica saddled the Plan’s participants with substandard investment portfolios that were managed by a Transamerica affiliate, Transamerica Asset Management (TAM),” and that “year after year, Transamerica selected and retained poor-performing proprietary investment portfolios for the Plan when superior investment options were readily available.”

Six ‘Pack’

The complaint goes on to specifically list six funds, claiming that “the underperformance of these portfolios, relative to several meaningful benchmarks, was neither modest nor temporary,” and that this “failure of effort and/or competence cost the Plan’s participants millions of dollars in poor investment performance every year.” Those six funds are:

  • Transamerica International Equity Portfolio
  • Transamerica Small Core Portfolio
  • Transamerica Large Value Portfolio
  • Transamerica Large Growth Portfolio
  • Transamerica High Yield Bond Portfolio
  • Transamerica Mid Value Portfolio

The complaint subsequently goes into extensive detail about each of the funds challenged, claiming that each one significantly underperformed benchmarks, and putting forth their notion of the impact in participant dollars resulting from those gaps.

Moreover, having outlined their reasoning behind replacing the fund, the plaintiffs note that the failure to remove these funds “despite the ongoing underperformance raises an inference of imprudence.” That inference is, for the moment, all they have to go on, since the complaint acknowledges that “Plaintiffs do 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” – going on to explain that this “information is unavailable to Plaintiffs prior to discovery.”

Tool ‘Fuel’?

The suit introduces a new element as well – that Transamerica “exacerbated Plan participants’ losses by encouraging them to sign up for Transamerica’s Portfolio Xpress, a tool that automatically allocated participants’ money to Transamerica’s investment products.” The plaintiffs allege that this tool “increased the likelihood that participants would invest in one of Transamerica’s imprudent proprietary portfolios.”

The suit references – and distinguishes – a suit/settlement (Dennard, et al. v. Transamerica Corp, et al, No. C15-0030 (N.D. Iowa) regarding similar allegations. In 2016, Transamerica paid $3.8 million to settle a case that also scrutinized the use of Transamerica-affiliated funds. That settlement also required Transamerica to make structural changes to its plan, including capping fees associated with certain in-house investments, adding a non-Transamerica managed low-fee bond fund, and providing record-keeping services to the plan at no cost. However, the plaintiffs here note that “Dennard’s limited release does not encompass the claims alleged herein under 29 U.S.C. § 1104(a)(1)(B) for Transamerica’s failure to monitor the Plan and remove imprudent, poorly performing investments.”

Ultimately, the current suit asks the court to:

  • Declare that each of the defendants who are fiduciaries of the Plan have breached their fiduciary duties under ERISA
  • Order 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
  • Order Defendants to provide all accountings necessary to determine the amounts Defendants must make good to the Plan
  • Assess a surcharge against Defendants and in favor of the Plan all amounts involved in any transactions which such accounting reveals were improper, excessive and/or in violation of ERISA
  • Enter an order requiring: (a) the disgorgement of profit made by any Defendant after June 24, 2016 (the date of the Denard settlement) for the breaches of fiduciary duty alleged herein; (b) declaring a constructive trust over any assets received by any breaching fiduciary after June 24, 2016 in connection with his/her/its breach of fiduciary duties, or violations of ERISA, or any non-fiduciary Defendant who knowingly participated in that breach or violation; and (c) any other appropriate equitable monetary relief, whichever is in the best interest of the Plan
  • Remove any breaching fiduciaries as fiduciaries of the Plan and permanently enjoining them from serving as a fiduciary of any ERISA-covered plan in which the plaintiffs or any member of the class is a participant or beneficiary
  • Appoint 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 imprudent investments
  • Certify the Class, appointing each of the Plaintiffs as a class representative, and appointing Plaintiffs’ counsel as Class Counsel
  • Award Plaintiffs and the class their attorneys’ fees and costs
  • Award Plaintiffs and the members of the class pre-judgment and post-judgment interest
  • Award such equitable, injunctive or other relief as the Court may deem just and proper

The plaintiffs also demand a jury trial.

“Reflecting our core mission, Transamerica provides a retirement plan with matching contributions to our employees to help them prepare for a secure and confident retirement,” said a Transamerica spokesperson. “In addition to proprietary funds, many of which are sub-advised by unaffiliated investment managers, our Plan includes a range of non-proprietary funds (both actively and passively managed), low-cost collective investment trust funds and a subsidized stable value fund – and gives participants the option of investing in a variety of mutual funds through a Schwab brokerage window. Transamerica also waives all Plan recordkeeping fees.

“Our business complies with all applicable state and federal statutes and regulations, and participates in periodic regulatory reviews. The allegations of wrongdoing against Transamerica in the recently filed lawsuit – which focuses on six ‘proprietary investment portfolios’ in the Plan – are false and we will vigorously oppose the case.”

The case is Karg v. Transamerica Corp., N.D. Iowa, No. 2:18-cv-01042, complaint 12/28/18.

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