Principal sued for stacking its TDFs with proprietary funds

The firm allegedly used high-cost, underperforming index funds in its hybrid target-date funds

Apr 19, 2018 @ 11:09 am

By Greg Iacurci

Principal Financial Group has been sued for allegedly loading its target-date funds with costly and underperforming in-house investments, in the latest example of 401(k) participants targeting financial firms for purportedly enriching themselves at investors' expense.

A trio of retirement-plan participants claim Principal breached its fiduciary duties with respect to its "disloyal and imprudent management" of the Principal LifeTime Hybrid Collective Investment Funds, which ultimately cost retirement investors millions of dollars in losses.

Hybrid target-date funds use a mix of underlying active and index funds. The funds in question are collective investment trusts, or CITs, a type of investment vehicle only offered in retirement plans.

Principal chose "to profit themselves and their affiliates by investing exclusively in Principal's proprietary index funds, despite fees that were 5 to 15 times higher than marketplace alternatives that tracked the exact same index," according to the lawsuit, Nelsen et al v. Principal Global Investors Trust Co. et al, which was filed Monday in the U.S. District Court for the Southern District of Iowa.

In addition to their higher fees, Principal's funds consistently had the "worst performance" on a pre-fee basis compared with similar products in the market. Further, Principal "intentionally selected" higher-cost versions of proprietary active funds at the expense of investors, according to the plaintiffs.

Fiduciaries of similar TDFs — like those offered by Charles Schwab, JPMorgan, AllianceBernstein and Great-West — all invested in nonproprietary index funds as underlying holdings, plaintiffs say.

The plaintiffs — Ashley Nelsen, Roody Jasmin and Joellyn Williams, who are investors in the TDFs — are seeking to recover losses, disgorge Principal's profits from the alleged breaches and prevent future mismanagement of the funds. Plaintiff Nelsen is a participant in the Starkey Laboratories Inc. retirement plan, and the latter two participate in the Fleetcor Technologies Inc. 401(k) plan.

Principal spokeswoman Jane Slusark said the firm disagrees with the lawsuit's allegations and "will vigorously contest them."

Several other financial services companies have been sued for self-dealing in recent years. A Wells Fargo lawsuit involving the firm's proprietary TDFs was dismissed in May, although a second lawsuit has been filed against the company over its use of in-house funds.

Allianz, TIAA and New York Life are examples of firms that have recently settled lawsuits related to proprietary funds in their company 401(k) plans.

0
Comments

What do you think?

View comments

Most watched

INTV

Young professionals see lots of opportunity to reinvent the advice experience

Members of the 2019 InvestmentNews class of 40 Under 40 have strategies to overcome the challenges of being young in a mature industry.

INTV

Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.

Latest news & opinion

New Jersey fiduciary rule: Pressure leads to public hearing, comment deadline extension

Industry push results in chance to air grievances on July 17 and another month to present objections.

InvestmentNews' 2019 class of 40 Under 40

Our 40 Under 40 project, now in its sixth year, highlights young talent in the financial advice industry. These individuals illustrate the tremendous potential of those coming up in the profession. These stories will surprise, entertain, educate and inspire.

Galvin to propose fiduciary rule for Massachusetts brokers

The secretary of the commonwealth is proposing a fiduciary standard in response to an SEC investment-advice rule he views as too weak.

Summer reading recommendations from financial advisers

Here are some books that will keep you informed and entertained during summer's downtime

4 strategies for Roth conversions

There's never been a better time to do a Roth conversion, and here are several ways to go about it.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print