John Hancock sued over 'self-dealing' in 401(k) plan products

A former John Hancock employee is leveling class action claims against the company, alleging it broke the law by packing its 401(k) menu with proprietary products.

The plaintiff, Jennifer Baker, was a participant in the insurance and investment provider’s plan between 2014 and 2019, according to the Feb. 27 complaint filed in U.S. District Court in Massachusetts. Ms. Baker allegedly suffered financial harm by being invested in John Hancock’s products instead of comparable, lower-cost investments from third parties that produced higher returns.

The case is the latest among many “self-dealing” claims filed in recent years against financial services firms over their own retirement plans. Others, including Goldman Sachs, Prudential, Morgan Stanley and Charles Schwab have similarly been sued. And as of 2018, there were at least 40 such class actions filed against financial firms for including their own products on their 401(k) menus, according to a report by the Center for Retirement Research at Boston College.

Although mutual fund sponsors and other financial services companies can have legal footing to add in-house products to their retirement plans, they generally must be able to show that they went through a prudent selection process.

“Two fiduciaries could choose the same investment option and face different risks of liability if one followed a prudent decision-making and monitoring process — for example, by considering the performance and costs of relevant benchmarks — and the other did not,” according to the CRR report. “So, plan fiduciaries have tended to face this kind of litigation when their funds have experienced persistently poor historical performance compared to similar ‘benchmark’ funds.”

The John Hancock plan was established in 1988 and represented $1.6 billion among 9,800 participants as of 2018, according to Labor Department data aggregated by BrightScope. The plan uses a group annuity structure in which participants opt for different investment options — all of which have been the company’s own investments since 2014, according to Ms. Baker's complaint.

The complaint also cites high fees and poor performance in its target-risk and target-date funds, compared to those of competitors. The John Hancock Multimanager Lifestyle Balanced, Conservative, Moderate, Growth and Aggressive funds represented $295 million in plan assets as of the end of 2018, according to the complaint. But those products had higher costs and weaker performance compared with investment options from American Funds, Fidelity Investments and Vanguard, Ms. Baker alleged.

John Hancock’s Multimanager Lifetime target-date funds represented $500 million of the company’s 401(k) assets as of 2018, and that line of products was pricier and had lower net returns compared with options available from American Funds, T. Rowe Price, TIAA and Vanguard, according to the complaint.

The plan also allegedly had excessively high administrative expenses during the class period, which dates to 2014. The participants covered those expenses through a 0.1% revenue-sharing fee baked into the mutual fund costs, according to the complaint.

“For financial service companies like John Hancock, the potential for imprudent and disloyal conduct is especially high, because the plan’s fiduciaries are in a position to benefit the company through the plan by, for example, using proprietary investment products that a nonconflicted and objective fiduciary would not choose,” according to the complaint. “[The company] used the plan — one of the largest 401(k) plans in the country — to promote John Hancock’s proprietary financial products and earn profits for John Hancock.”

The plaintiff is seeking restitution for the alleged losses, disgorgement, interest, attorneys’ fees and other potential awards on behalf of the proposed class.

Ms. Baker is represented in the lawsuit by Block & Leviton and Nichols Kaster, both of which have brought class-action ERISA cases against financial services firms in the past.