Latest in 401(k) litigation: Cap Group sued, MetLife to pay $4.5M settlement

Settlements and new cases continue as law firms claim asset managers did wrong by using their own products.

MetLife will pay $4.5 million to settle a lawsuit over the company’s 401(k) plan, according to court records filed Monday.

That amount will resolve a 2021 case alleging that the insurance company violated its fiduciary duty to plan participants by including in-house products on the 401(k) menu rather than ostensibly superior funds from competitors. MetLife indicated last month it had reached a settlement in principle, but the details of the agreement were only just made public.

The settlement will apply to the plan’s participants and beneficiaries who held MetLife index funds between July 19, 2015, and Dec. 31, 2021.

Of the $4.5 million, an undisclosed amount will go to attorneys’ fees, though the settlement notice did not specify what the figure will be. Often, ERISA retirement plan lawsuits have put the limit for those costs at a third of the total settlement.

Unlike many other ERISA lawsuit settlements, there is not a nonmonetary component to the agreement. That’s because at MetLife moved its index funds from group annuity contracts to collective investment trusts at the beginning of 2022, which significantly reduced the fees participants pay, court records show.

But the monetary component of the settlement is relatively low, especially for a class-action case involving a $7.9 billion plan.

Earlier this year, General Electric and Verizon settled lawsuits over their 401(k) plans for $61 million and $30 million, respectively. Those, along with the MetLife agreement and others, represent an uptick in retirement plan lawsuit settlements — a result of a spike in litigation that started a couple years ago.

Last week, another group, Yale-New Haven Hospital, indicated that it is settling a lawsuit over its 403(b) plan for $1 million, with as much as 25% of that going to attorneys’ fees. The hospital succeeded in having several claims involving investment selection dismissed earlier this year, but claims over excessive record-keeping and administrative expenses survived.

FUND COMPANY TARGETED

Capital Group, the provider of American Funds, was sued this month over its own $5 billion 401(k) plan. In that case, the plaintiffs in the proposed class action allege that the company breached its duties to the plan by “mismanaging and failing to remove imprudent investments” and not monitoring the fiduciaries it appointed.

The allegations apply to five funds on the plan menu: the American Funds AMCAP, Fundamental Investors, Investment Company of America, Washington Mutual, and Capital World Growth and Income funds.

Since 2019, the low-cost R6 shares of those funds have had net returns, annualized and compounded, that have lagged options available from competitors such as Goldman Sachs and J.P. Morgan, the plaintiffs stated in the Nov. 14 complaint.

“Despite a market brimming with better-performing large-cap alternatives, Capital [Group] retained its own American Funds as plan investment options,” the plaintiffs wrote. “To date, these American Funds have taken in nearly a billion dollars in retirement investments from plan participants.”

The Employee Retirement Income Security Act does not mandate that asset managers include competitors’ products in their plans. However, plan fiduciaries are expected to be able to show that they followed and documented a prudent process in selecting plans’ investment options.

The funds in identified in the suit are not necessarily poorly regarded. Although the AMCAP fund has lagged its index and category, the Investment Company of America, Fundamental Investors and Washington Mutual funds have outperformed their categories over 10 years, despite lagging their benchmarks, according to data from Morningstar. Meanwhile, the American Funds Capital World Growth and Income Fund has beaten its category average and has had net returns similar to the index it tracks.