Lawsuit Challenges TDF Selection, Excessive Fees

By Nevin Adams • August 30, 2016 • 0 Comments

A plan sponsor and its recordkeeper are facing a class action for its selection of what are alleged to be target-date funds that charged excessive fees.

The plan sponsor, Safeway, and its recordkeeper (now Empower, by way of Great-West, by way of J.P. Morgan Retirement Plan Services) are being sued by plan participant Dennis M. Lorenz for selecting target-date funds (JPM Smartretire Passiveblend Funds) affiliated with its recordkeeper.

The suit (Lorenz v. Safeway, Inc., N.D. Cal., No. 4:16-cv-04903, complaint filed 8/25/16), claims that the JPM Smartretire Passiveblend Funds charged participants in the plan who invested in such funds between 47 and 50 basis points for a management fee, and that, by comparison, the BlackRock Lifepath Index funds (which were replaced by the JPM Smartretire Passiveblend Funds on the fund menu in 2011) “charged only a 13 basis point fee.” Moreover, the suit alleges that there were other alternatives that “charged substantially lower fees,” citing as an example the 15 basis points charge by TDFs offered by Vanguard.

The suit also takes issue with the plan’s use of revenue-sharing, noting that the management fee charged to participants for investing in the JPM Smartretire Passiveblend Funds included a 20 basis point revenue sharing payment to JPMRPS and later Great-West for recordkeeping services — an arrangement that the plaintiffs allege “resulted in compensation to JPMRPS/Great-West far in excess of reasonable compensation for such services.”

The suit also alleges that “the duty of prudence also requires that plan fiduciaries investigate whether revenue sharing is a reasonable and cost-effective way to pay for administrative services incurred in connection with a plan, such as record-keeping services.”

The suit notes that while the total participants in the plan dropped from a total of 41,363 participants with account balances in 2011, to 38,126 in 2014, the assets in those funds rose from $119 million to more than $244 million during the same period, resulting in higher revenue-sharing payments. “In other words,” the suit alleges, “JPMRPS/Great-West received greater and greater revenue for providing the same services (in fact, more than double the revenue in 2014 than in 2011) to a smaller number of participants.” They also note that only two of the funds offered by the plan (the Pimco Total Return and Chesapeake Core Growth fund) involved a higher revenue sharing payment than the JPM Smartretire Passiveblend Funds.

The suit claims that the “Safeway Defendants could have obtained record-keeping services at a much lower rate, had they:

  • negotiated a per-participant payment for recordkeeping rather than an asset-based charge; or

  • negotiated a lower asset-based charge when it became clear that the amounts invested in the JPM Smartretire Passiveblend Funds were growing so quickly so as to generate a windfall for JPMRPS/Great-West.”

In seeking class action status, the suit claims that the Safeway Defendants breached the duty of prudence in connection with selecting the JPM Smartretire Passiveblend Funds because, among other things, the funds:

  • charged higher fees than comparable, readily available funds;

  • had no meaningful record of performance so as to indicate that higher performance would offset this difference in fees, and

  • were managed by a company affiliated with the plan’s recordkeeper, JPMRPS, and trustee, Chase.

“Had the Safeway Defendants conducted an adequate investigation of available alternatives, without the influence of JPMRPS and Chase, they would have selected target date funds with an established record of performance and lower fees, such as the Vanguard target date funds,” according to the complaint.