Capital Group, the sponsor of American Funds, sued for self-dealing in its 401(k) plan

The plaintiff claims roughly 95% of investment options offered in the plan since 2011 were "unduly expensive" proprietary funds that led to less retirement savings for participants

Jun 15, 2017 @ 11:21 am

By Greg Iacurci

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The recent lawsuit lodged against The Capital Group Companies Inc. for alleged self-dealing in the company's 401(k) plan is one of several similar legal battles being waged with large asset managers, and could prove difficult for plaintiffs to win, given recent court treatment.

Capital Group is being sued for allegedly reaping profits from its 401(k) plan at the expense of plan participants, by loading its company retirement plan with high-cost proprietary investment options.

It is the latest in a string of asset managers to be sued for using in-house funds in its company retirement plan.

"I think in terms of why we're seeing this turn to litigation against the financial services plans, we have what we had before in the excessive-fee litigation: big plans with a lot of money," said John Utz, an employee benefits and executive compensation attorney at Utz & Lattan. "But on top of that, you have what naively looks like a set of conflicted decisions made in choosing these options."

BlackRock Inc., T. Rowe Price, JPMorgan Chase & Co., Jackson National Life Insurance Co., Franklin Templeton Investments, American Century Investments and Allianz Asset Management are among those who have self-dealing cases pending against them.

Some, such as New York Life and TIAA, recently settled their lawsuits, for $3 million and $5 million, respectively.

Mr. Utz pointed out a few hurdles for plaintiffs in these sorts of lawsuits. First, there are prohibited-transaction exemptions in the Employee Retirement Income Security Act of 1974 that permit financial services companies to use their own funds in their retirement plans, he said.

Further, many of these lawsuits, including the one against Capital Group, rely on comparisons of fund fees to those of low-cost provider Vanguard Group to make a claim of fiduciary breach.

However, courts have recently rejected these Vanguard arguments, as in recent lawsuits involving Wells Fargo (Meiners v. Wells Fargo & Co. et al) and Putnam Investments (Brotherston et al v. Putnam Investment, LLC et al).

"We're starting to see these decisions that say, 'No, no, no, that's just too simple an analysis,'" Mr. Utz said.

Courts have said Vanguard funds are not completely identical to the proprietary funds in question, and that fiduciary breach is about proving a flawed fiduciary process rather than a flawed result such as fees or performance, Mr. Utz said.

Capital Group spokesman Tom Joyce said the complaint against the company is without merit, and that the funds offered to employees "are recognized in the industry as having among the lowest fees in their peer categories and superior investment results."

'UNJUST PROFITS'

Capital Group is among the largest asset managers in the world, with roughly $1.4 trillion under management, and sponsors the American Funds family of mutual funds, a perennial favorite among advisers.

A plan participant, D'Ann M. Patterson, is seeking to recover losses and secure disgorgement of "unjust profits" to Capital Group and its subsidiaries for "conflicted, disloyal, imprudent, and self-interested decisions" regarding the company's investment selections.

Using in-house investment funds "resulted in plan participants and beneficiaries paying excessive and prohibited fees that substantially diminished their retirement savings, and resulted in windfall profits for Capital Group and its subsidiaries," according to the complaint, filed June 13 in the U.S. District Court for the Central District of California.

In the proposed class-action lawsuit, D'Ann M. Patterson v. The Capital Group Companies Inc. et al, the plaintiff claimed roughly 95%-98% of investment options offered in the plan since June 2011 were "unduly expensive" Capital Group-affiliated funds.

The Capital Retirement Savings Plan, which has roughly $3.2 billion in plan assets and more than 9,000 active participants, offered between 38 and 46 fund options during that period, according to the complaint.

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