A Federal court recently dismissed motions to dismiss two class action lawsuits against Fidelity and Putnam based on excessive fees claims. Though the claims were for different issues, the themes and concerns by plan sponsors are the same – class action and excessive fees lawsuits are here to stay.
The Fidelity case was filed on behalf of participants in the Barnes & Noble defined contribution (DC) plan claiming that the provider charged excessive fees in their stable value fund (SVF). In another recently filed lawsuit, the SVF manager was reported to have earned 4.6% return but only guaranteed investors 1.82%. Though the SVF provider takes some risk, they also get the benefit if they invest wisely, which seems only fair. But the issue is about disclosure and, in the lawsuit, the fact that the SVF provider was also the record keeper earning additional fees. Did the spread of 2.78% between what investors earned and what the SVF yielded constitute unreasonable revenue to the record keeper who also managed the SVF? Should plan sponsors be held responsible?
Ironically another suit filed against Vanguard claimed that the provider should have offered stable value rather than money market funds which, in a low interest environment, offer miniscule returns.
The case against Putnam, which is now called Empower-Retirement, alleges that the provider loaded the plans with high cost proprietary mutual funds. Though the move towards offering funds not managed by the plan’s record keeper is growing, there are still a lot of proprietary funds in DC plans. Which is alright as long as these funds are properly vetted and pass screens set up in a company’s Investment Policy statement.
The really important take away is that the rash of 401k lawsuits is only growing especially if courts allow class action status which, according to the judge in the Putnam and Fidelity cases must show, “facts sufficient to state plausible claims…” All of which could lead to more settlements which lead to more cases.
