Fund manager MFS sued for self-dealing in its 401(k) plans

The plaintiff claims the plans were 'loaded' with proprietary mutual funds, and 98% of the investible assets were held in company-affiliated investments

Jul 10, 2017 @ 12:32 pm

By Greg Iacurci

MFS Investment Management has been sued for self-dealing in its company 401(k) plans, becoming the latest fund firm to be targeted for stocking its retirement plan primarily with proprietary investments.

The plaintiff in the lawsuit, Velazquez v. Massachusetts Financial Services Co. et al, claims the company "loaded" two MFS 401(k) plans, worth around $700 million total, with high-cost in-house funds that cost participants millions in lost savings.

"Defendants have used the Plans as an opportunity to promote MFS's mutual fund business and maximize profits at the expense of the Plans and their participants," according to a legal complaint filed July 7 in Massachusetts district court.

In addition, defendants failed to consider collective investment trust funds and separate accounts as alternatives to mutual-fund investments, and failed to monitor and control record-keeping expenses.

"We stand firmly behind the investment offerings in our employee retirement plans and our process in selecting these options," Daniel Flaherty, a spokesman for MFS, said.

The plaintiff, Melissa Velazquez, a former participant in MFS' "materially identical" 401(k) plans, one for employer and the other for employee contributions, claims the "vast majority" of investments in the retirement plans since 2011 were MFS-affiliated funds.

The plan also invested in Russell LifePoints Mutual Funds that, while not managed by MFS, contained numerous underlying funds for which MFS serves as a sub-adviser, according to the proposed class-action lawsuit.

In 2015, for example, 60 of the plan's 76 funds were proprietary MFS mutual funds, according to the complaint, which also alleges that 98% of the plans' investable assets were held in MFS-affiliated investments throughout the relevant time period.

Financial services companies, especially fund managers focused on active management, have been increasingly targeted in 401(k) litigation alleging self-dealing. Within the past year, firms such as Capital Group, Waddell & Reed, T. Rowe Price, JPMorgan and Franklin Templeton have been served with similar litigation.

While some companies such as New York Life and TIAA have settled, others such as Putnam and Wells Fargo have had recent success defending against self-dealing litigation.


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