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Proprietary Fund Suit Served on Another Money Manager

Just when you think all the 401(k) plans with proprietary funds have been sued — another lawsuit emerges.

The latest (Schapker v. Waddell & Reed Financial, Inc., D. Kan., No. 2:17-cv-02365, complaint filed 6/24/17) was brought by a participant in the Waddell & Reed 401(k) plan. The suit alleges that the plan fiduciaries “…acted in their own self-interest rather than in the interests of the 401(k) Plan and its participants in choosing their own proprietary funds for inclusion on the 401(k) Plan menu of investment options and thereby causing WR FINANCIAL and its affiliates to reap and realize the reward of the investment fees paid by the 401(k) Plan.”

‘Avail’ Abilities?

The suit claims that the defendants “…could have chosen non-proprietary, less costly, better-performing investment options for the 401(k) Plan,” but instead they “simply offered as investment options whatever investment products were part of the then-available line-up of ‘Waddell & Reed’ and ‘Ivy Funds’ investment products on the market — i.e., funds established and managed by WR FINANCIAL and its affiliates.”

The plaintiffs noted that the funds available in the plan:

  • “In all or nearly all cases, were operated and managed by Defendants themselves;”

  • “In nearly all cases, cost more than comparable available investment options;”

  • “In nearly all cases, performed worse than comparable available investment options;” and

  • “In a number of cases and during a substantial portion of the Class Period, were duplicative in content but not cost – i.e., the same investment product with the same holdings cost more when branded one way (‘Waddell & Reed’) than when branded another way (‘Ivy’).”

Extricate Actions?

The suit charges the plan with selecting a default fund managed by the defendants, and for failing to concentrate assets so as to qualify for investment funds that had lower fees and leverage plan assets to drive down fees. They go so far as to take the fiduciaries to task for not allowing a self-directed brokerage account that would have allowed participants “to extricate themselves from the core menu of designated alternatives selected by the fiduciaries.” As a result, the plaintiff says that participants were “trapped in funds (other than a single money market fund sometime after June 30, 2016) that directly benefitted WR FINANCIAL and its affiliates.”

The suit notes that during the Class Period, more than 97% of the investment “opportunities” made available to the 401(k) plan participants were established and managed by WR FINANCIAL or its affiliates, and that, based on information available to the plaintiff at the time of filing, it appears that, “during the entirety of the six-year Class Period, only one unaffiliated investment option was ever offered to 401(k) Plan participants” — and that not until sometime after June 30, 2016 (the suit notes that, effective June 15, 2016, defendants did finally eliminate some of the duplicative investment options and false choices and pool some of the investment funds into collective investment trusts with lower fees).

Plaintiffs noted that Waddell & Reed’s own corporate filing with the Securities and Exchange Commission acknowledged a “trend” toward lower fees that it said had “accelerat[ed],” subjecting WR FINANCIAL to “…increased pressure to reduce fees from competitors and investors” — but, to hear plaintiffs describe it, apparently not within its plan.

As of the end of the 2015 plan year, the Waddell & Reed 401(k) Plan had $201,949,399 in assets and 2,172 participants.