Edward Jones is being sued by a participant in the company's 401(k) plan for allegedly causing employees to pay high fees for investment management and record-keeping services that supposedly cost them millions in retirement savings.
Many of the allegations in proposed class-action lawsuit, McDonald v. Edward D. Jones & Co. L.P. et al, which was filed Aug. 19 in Missouri district court, will be familiar to those following other excessive-fee cases against sponsors of multibillion-dollar 401(k) plans. The Edward D. Jones & Co. Profit Sharing and Deferred Compensation Plan had nearly $4 billion in assets and 36,000 participants as of year-end 2014.
The plaintiff claims unreasonable fees paid to the plan record keeper, Mercer HR Services Inc., lost $8 million in aggregate retirement savings over the proposed class period, Aug. 19, 2010 through the present.
Further, the plan offered high-cost mutual fund share classes when lower-cost alternatives were available for identical funds, leading to $13 million in excessive fees, according to the complaint. Participants allegedly would have saved tens of millions more dollars if assets were invested in collective investment trust funds and separately managed accounts, the plaintiff claims.
Additionally, until 2013, Edward Jones allegedly only offered actively managed mutual funds on the investment menu, without inclusion of lower-cost index funds. Fiduciaries also failed to offer a stable value fund as a cash-preservation option, selecting a money market fund instead, which lost participants “over 12% of their buying power,” according to the complaint.
The lawsuit continues a barrage of litigation filed against corporations in recent weeks for fiduciary breach in their retirement plans.
Another major brokerage, Morgan Stanley, was targeted Friday in a $150 million lawsuit, and financial services companies such as Neuberger Berman, Franklin Templeton, New York Life Insurance Co. and American Century Investments have seen similar legal action since June.
One seemingly unique aspect to the case is an allegation over how a distribution relationship between Edward Jones and mutual fund companies influenced its 401(k) fund choice.
Edward Jones maintains relationships with “partners” and “preferred partners” at the retail brokerage level, whereby the former receives millions in revenue-sharing payments from fund managers in return for benefits such as “greater access to certain information about its business practices, frequent interactions with Edward Jones financial advisers, marketing support and educational presentations,” according to the lawsuit.
Edward Jones receives a financial benefit for “keeping preferred partners happy, so to speak,” and one other benefit the company bestows “seems to be inclusion in the 401(k) plan for Edward Jones employees,” Mark Boyko, associate attorney at Bailey Glasser, the plaintiff's law firm, said.
Bailey Glasser is responsible for the litigation involving Neuberger and Franklin.
“We're not alleging the payment is going on within the plan assets, but we are alleging the preferred partner relationship is the reason why those funds are being included in the plan,” Mr. Boyko said.
Of the 401(k) plan's 53 different investment options, at least 40 are managed by the partners or preferred partners.
And of the 12 mutual fund families listed in Edward Jones' 2015 revenue-sharing disclosure, eight — American Funds, Franklin Templeton, Invesco, The Hartford, MFS, Lord Abbett, JPMorgan and Goldman Sachs — have funds in the 401(k) plan, representing approximately 80% of plan assets, the plaintiff claims. The 18 investments of American Funds, which paid the most in revenue sharing to Edwards Jones in 2015, hold nearly 50% of plan assets.
The plan offers eight actively managed large-cap funds managed by the preferred partners, for example. Collective underperformance for these and the plan's other large-cap equity funds resulted in more than $100 million in lost money compared to their S&P 500 benchmark and index alternatives, according to the lawsuit.
John Boul, spokesman for Edward Jones, said allegations that the firm violated its fiduciary duties or engaged in prohibited transactions related to plan assets “are not true.”
“At the heart of the lawsuit is the allegation that the firm profits from the plan's investments by retaining for itself revenue sharing payments paid by product partners. This allegation is patently false,” Mr. Boul said.
Mr. Boul also said the lawsuit “makes numerous faulty assumptions, contains factual errors and inaccurately characterizes the manner in which the plan is administered. None of these has any evidentiary support and will be proven to be demonstrably false.”
While the vast majority of such litigation occurs in the corporate 401(k) market, a torrent of filings over a two-week period this month against university 403(b) plans indicates a broadening in scope for excessive-fee lawsuits.
“The floodgates are open, and this is just the beginning,” according to Marcia Wagner, principal at The Wagner Law Group. “When the tort bar takes hold, it takes hold.”
Of course, just because a complaint is filed doesn't mean there's merit to the allegations — the truth typically comes out in more advanced stages of litigation, Ms. Wagner said.
However, there's no end in sight for excessive-fee litigation, and the extent to which such lawsuits will upend the retirement industry is unknown, she added.
“Our courts are really clogged right now, and if we start having lawsuits against RIAs, broker-dealers and plan sponsors, our court system will get slower and potentially more erratic,” Ms. Wagner said. “This is the beginning of something big and no one will predict how the courts will be able to handle the onslaught.”