Edward Jones the Latest 401(k) Litigation Target

By Nevin Adams • August 22, 2016 • 0 Comments
Another broker/dealer has been accused of larding its 401(k) plan menu with investment options from mutual fund families that paid hundreds of millions of dollars to the firm, despite what are alleged to be “high fees, poor performance prospects, and availability of better-performing, lower-cost alternatives.”

Edward D. Jones & Co. is the latest financial services firm accused of breaching its ERISA fiduciary duties by using its employees’ 401(k) plan assets for its own benefit. In a twist on the series of proprietary fund-focused suits, this one alleges something of a quid pro quo where Edward Jones is alleged to have included fund options on its menu that benefits the firm’s mutual fund partners.

The suit — filed by Bailey & Glasser LLP, which seeks to represent the class – alleges that during the class period the Edward Jones plan had invested in at least 53 different investment options, “of which three were managed by Defendants and at least 40 more were managed by Partners or Preferred Partners of Edward Jones.”

Additionally, the suit (McDonald v. Edward D. Jones & Co., L.P., E.D. Mo., No. 4:16-cv-01346, complaint filed Aug. 19, 2016), brought in the U.S. District Court for the Eastern District of Missouri, charges that the plan fiduciaries caused the plan to pay, directly or indirectly, tens of millions of dollars to the plan’s recordkeeper (Mercer HR Services, Inc.) that it alleges were “excessive and unreasonable” given the services provided, and that the fiduciaries “failed to monitor and control these costs despite lower-cost recordkeeping alternatives.”

According to the suit, the plan’s payments to Mercer increased by 314% between 2010 and 2014 even though market rates for recordkeeping services declined over that period and even though the number of plan participants only increased by 22%.

Investment Issues

The suit claims that the plaintiff’s individual account in the plan was invested in various investment options offered under the plan’s investment menu in the class period, with allocations set by the plan fiduciaries according to the plaintiff’s investment election for a balanced toward growth portfolio.

“Plaintiff, like substantially all plan participants and beneficiaries, was not provided any information regarding the substance of deliberations, if any, of Defendants concerning the Plan’s menu of investment options or selection of service providers during the Class Period,” and “otherwise had no knowledge of the substance of the deliberations, or of the nature of the investments he selected in the Plan beyond what was provided to him by the Plan. Plaintiff discovered his claims shortly before commencing this action.”

The plaintiffs allege that “as consideration for the asset fees and sales fees ‘shared’ with Edward Jones by the Preferred Product Partners, Edward Jones provides them with greater access to certain information about its business practices, frequent interactions with Edward Jones financial advisors, marketing support and educational presentations.”

The suit goes on to claim that of the 12 mutual fund families listed in the 2015 Edward Jones revenue sharing disclosure, eight have fund offerings in the Plan. The eight mutual fund family partners (or Preferred Partners) represented in the plan accounted for 92% of the revenue sharing paid by mutual fund families to Edward Jones in 2015.

The suit goes on to allege that, for the exact same mutual fund option, the plan has offered higher-cost share classes of identical mutual funds than were available to the plan — but that, on June 27, 2016, “only after learning of Plaintiffs’ investigation into their Plan, Defendants moved the Plan into the less expensive share classes of most of the mutual funds in the Plan.” The suit claims that participants “paid over $13 million in excessive fees based on Defendants’ failure to utilize lower-cost share classes of identical mutual funds during the Class Period.”

The plaintiffs also challenge the lack of any low-cost index funds in the plan until 2013, and that even then, “Edward Jones did not map existing Plan assets into the (three) index funds, and did not include the index funds in its pre-set asset allocation portfolios. As a result, few assets moved into these funds,” resulting in what they claim was “over $100 million of lost performance compared to the fund’s S&P 500 benchmark and their index alternatives.”

Stable, Valued

The suit also challenges the lack of a stable value fund offering, and its use of the American Funds Money Market Fund, from which it alleges that “the Plan and its participants have not received any return at all from their investment in the Money Market Fund since it was first sold on May 1, 2009.” Moreover, it claims that investors in this most-conservative options have lost more than 12% of their buying power during the class period, and that the plan lost in excess of $15 million during the class period as a result of losses sustained by the Money Market Fund compared to stable value alternatives.

As other such suits have challenged, the plaintiffs also contest the use of asset-based revenue-sharing to pay for recordkeeping services, and that, “accordingly, in 2013 the Plan was 88% more expensive than the average Plan with over $1 billion in assets, even though the Plan had over $3 billion in assets and fees generally drop as assets increase. This represents a difference of over $9 million in 2013 alone,” according to the suit.

The suit acknowledges that in June 2016, the defendants set a flat percentage for Mercer’s recordkeeping fee of 8 basis points (bps), with any revenue sharing received above that threshold returned to the plan. However, they have issues with that fee as well — noting that an 8 bps fee would be over $66 per participant based on the plan’s 2014 Department of Labor filings.

“Further, because it is based on the amount of assets and not based on the amount of services Mercer is providing, is susceptible to the same problems as the revenue-sharing this new fee is designed to replace,” plaintiffs argue. They go on to claim that, “had Defendants ensured that participants were only charged reasonable fees for administrative and recordkeeping services, Plan participants would not have lost well over $8 million in their retirement savings through unreasonable recordkeeping fees.”

Edward Jones’ plan has 35,929 participants and more than $3.9 billion in assets, according to the complaint.