A recently filed case involving allegations that 401(k) plan sponsors charged excessive fees is raising questions on whether general account products, group annuities and stable-value products might also become a focal point in future litigation.
Dennis Gordan, a participant in Massachusetts Mutual Life Insurance Co.'s retirement plan, filed suit against the insurer along with a slate of fellow participants in the insurer's thrift plan on Tuesday in the U.S. District Court in Massachusetts.
He alleged that MassMutual, its investment fiduciary and plan administrative committees, as well as a group of executives, offered “almost exclusively” proprietary funds via a group annuity contract made available to the workers.
The suit is no ordinary 401(k) fee case.
For one thing, Mr. Gordan is represented by Jerry Schlichter of Schlichter Bogard & Denton LLP, an attorney who's won settlements against Cigna Corp., Caterpillar Inc. and Bechtel Corp. in 401(k) fee suits. Mr. Schlichter also is representing participants in Ameriprise Financial Inc.'s 401(k) in a suit against the company.
This latest suit also could give rise to a wave of litigation on group annuities, stable-value and general account products, noted Marcia Wagner, managing director at The Wagner Law Group.
“There is an amazing amount of potential for cross-subsidization, where the cost of the product will subsidize record keeping, marketing and compensation,” she said. “The problem is that in many of these products, that's not disclosed. With stable value, it's almost impossible to tell the rate of return and how it's calculated.”
“It's not just group annuities, but stable-value and general accounts that will be the next shoe to fall,” Ms. Wagner said.
Mr. Schlichter declined to predict whether there would be a rise in litigation based on these products, but he stressed that firms that manufacture financial products owe a fiduciary duty to their workers.
“Fiduciaries who populate a plan with their own products have a duty to determine whether those products are complying with the fiduciary standard; they can't favor their proprietary products,” Mr. Schlichter said.
In the MassMutual case, participants could choose to use MassMutual separate investment accounts or the insurer's general account, also known as a fixed-interest account, within the annuity, according to the suit. Terms of the annuity contract figured prominently in the allegations.
For instance, the suit cites a provision in the contract that barred the plan sponsor from adopting “any change or amendment that would have an adverse effect on MassMutual's administrative procedures or the financial experience of MassMutual.”
As much as 40% of the plan's assets were in the carrier's fixed-interest account, according to the suit. Mr. Gordan claimed that the insurer and its executives had more than $500 million in working capital for their general account, all coming from MassMutual's employees' retirement savings. Further, the company made additional revenue from spread — the difference between what the investments in the general account earned and what was credited to the plan, according to the suit.
Fees on the general-account product, counting for record keeping and risk charges, totaled between 115 and 175 basis points, according to the suit. Meanwhile, earnings from spread reached multiples of those figures and were never disclosed to participants, Mr. Gordan alleged.
“We believe the comprehensive retirement benefits we offer our participants help them save toward a secure financial future,” said Patty Norris Lubold, a MassMutual spokeswoman. “We will defend vigorously against these baseless allegations.”