Wells Fargo scored a rare victory in the growing wave of 401k and 403b lawsuits while Princeton University became the latest victim in cases filed against academic institutions. A lawsuit against United of Omaha’s GIC (guaranteed investment contract) portends other cases against similar capital preservation funds.
The judge dismissed the Wells Fargo’s $35 billion 401k plan case brought by participants in the financial services company’s plan because they failed to show meaningful benchmarks that substantiated their claim that the fees in the plan’s target date funds (TDFs) were excessive and that performance was poor. Though similar Vanguard and Fidelity funds were less expensive, the federal judge in Minnesota noted that defined contribution plans cannot be held liable for not picking the cheapest funds.
Neither was the fact that the Wells Fargo fund was proprietary sway the judge nor was there evidence that the company used their own plan to seed the fund. The Wells Fargo case, which cannot be refiled, is a rare win in a string of lawsuits filed against financial service company 401k plans by their participants.
Cases against universities continued with Princeton the latest with participants in plans alleging that the institution failed to use their buying power to negotiate lower fees and that by using two record keepers, TIAA and Vanguard, fees were unnecessarily high. Some experts believe that universities are more likely to litigate rather than settle providing valuable legal precedence.
Finally, the case against United of Omaha by a participant who invested in their GIC filed in federal court in Nebraska alleged unreasonable fees, insufficient transparency and restrictions on withdrawals and transfers.
With low interest rates, many plans are turning from money market funds to GICs and stable value funds as a way for participants to preserve capital while enjoying a reasonable return. The problem, as alleged in the case against United of Omaha and other similar lawsuits, is that the fund sponsor sets the rate of return without specifying costs making it hard to impossible to determine their fees. Assets in these funds are mixed with many insurance company’s General Accounts further obfuscating fees and returns.
Lessons for plan sponsors:
- Conduct a periodic, documented, comprehensive fee benchmarking and RFP for all services including:
- Record keeping and administration
- Funds
- Advisors
- Using a fiduciary advisor, make sure you understand how TDFs and GICs work as they are the most popular investments in defined contribution plans
