A new 401(k) lawsuit is targeting NFP Retirement, its flexPath subsidiary and a plan sponsor over the use of proprietary investments that had higher costs than third-party options.
The Feb. 16 class-action suit is brought by Schlichter, Bogard & Denton, the firm with the longest history of 401(k) plan litigation.
At the heart of the case is the flexPath target-date series, which was added to the plan in 2016, when it was essentially brand new. That alone went against the plan’s investment policy statement, which required options to have a five-year performance track record, according to the complaint. The sponsor to the $2.4 billion plan is the Nevada-based Wood Group.
The law firm contends the defendants breached their fiduciary duties in the selection of the target-date funds, as well as several other investment options that had higher costs and lower performance than funds readily available from peers. That also led to transactions that were prohibited by the Employee Retirement Income Security Act, the plaintiffs allege.
“Shortly after the appointment of NFP, the Wood defendants added NFP’s affiliated target-date funds to the plan in June 2016, based on the advice and recommendation of NFP,” the complaint alleges. “After their removal from the plan during 2018, NFP seized on the opportunity to replace this loss of revenue by recommending the placement of other affiliated investments in the plan called the International Stock, Core Bond and Large Cap Value funds.”
Some of the allegedly excessive fees incurred by plan participants were due to the funds investing in other underlying funds. In the target-date series’ case, it held shares of BlackRock’s LifePath Index target date funds, according to the lawsuit. The flexPath series included a variety of investment options for participants, as it used a range of different glide paths that varied according to risk preference.
“The BlackRock LifePath Index target date funds charge 8 basis points. In contrast, flexPath strategies charged plan participants 26 bps,” the complaint alleges. “This resulted is an additional 18 bps — 225% more — to invest in flexPATH’s version of the target date funds.”
The plan also later switched to different NFP-affiliated investment products, including some that were relatively new and carried higher fees due to investing in underlying funds with their own investment expenses, the plaintiffs contend.
Additionally, the plan included some mutual funds on its menu that were not of the lowest-cost share class available, according to the complaint.
The Wood Group and NFP did not respond to requests for comment.
The proposed class of plaintiffs includes about 10,000 people, according to Schlichter, Bogard & Denton. The case was filed in U.S. District Court in the Central District of California.
Another investment firm, Natixis Investment Managers, has been sued over the 401(k) plan it provides to its own employees.
The Boston-based firm allegedly breached its fiduciary duty to its 1,600 plan participants by opting for its own funds over better performing, lower-cost third-party options, according to a Feb. 18 class-action lawsuit filed in U.S. District Court in Massachusetts.
The $438 million plan had total average fees of 62 basis points as of 2019, compared with industry-average fees of 39 bps for comparably sized plans, the plaintiffs stated.
“The plan’s excessive fees are entirely due to its concentration of proprietary funds, which, on average, cost seven times more than the plan’s nonproprietary options and accounted for 90% of the plan’s expenses,” the complaint alleges.
“For financial service companies like Natixis, the majority owner of several boutique mutual fund companies such as Oakmark, Vaughan Nelson, Loomis Sayles and AEW, the potential for imprudent and disloyal conduct is especially high, because the plan’s fiduciaries are in a position to benefit the company.”
The inclusion of the affiliated funds within the plan led to participants allegedly paying “tens of millions of dollars” in higher fees, according to the suit.
The company is contesting those claims.
“We believe the lawsuit is entirely without merit, and Natixis will defend itself vigorously against the claims,” a Natixis company spokesperson said in a statement. “Our retirement savings plan offers employees a diverse lineup of investment options, which are rigorously reviewed to ensure reasonable fees and solid investment returns.”
The plaintiffs in the case are represented by law firms Block & Leviton and Nichols Kaster.
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