Principal Financial recently won a long-running lawsuit over its role in managing a fixed-income option in group annuity contracts offered within 401(k) plans.
The company, which was sued in 2014, was accused of breaching its fiduciary duty in connection with excessive compensation it got from the Principal Fixed Income Option in retirement plans since late 2008.
Principal set a guaranteed rate of return for the product every six months, which plans can reject — but to do so they must pay a 5% surrender charge or provide notice 12 months before withdrawing assets from the investment option, according to court records. Individual participants have the option of pulling their money from the fixed-income option at any time, although they cannot transfer the money to a competing, or similar, investment within the plan for 90 days.
“The evidence at trial demonstrated that these restrictions on participants’ reinvestment options upon withdrawal from the PFIO, and on plan sponsors’ withdrawals from the PFIO, benefit participants by reducing the risk of large, sudden cash outflows from the PFIO,” the judge wrote in the April 8 opinion. “The evidence also demonstrated that, without these restrictions, Principal could not offer a pooled guaranteed product with a rate as high and as stable as the PFIO.”
The lawsuit, which was brought by a participant in an extermination company’s 401(k) plan, was dismissed in 2018. But last year, a surprising ruling by an appellate court that Principal Financial was a fiduciary to the plan sent the case went back to the lower court.
After a six-day bench trial in U.S. District Court in the Southern District of Iowa Central Division, a judge ruled in favor of Principal Financial on all counts. Principal Financial set rates for the product that were in the best interest of plan participants, and the company did not engage in self-dealing prohibited by the Employee Retirement Income Security Act, the judge noted.
Salesforce again succeeded in getting a complaint over its 401(k) plan dismissed. The case, one of many brought against plan sponsors by law firm Capozzi Adler, was filed last March.
The plaintiffs alleged that Salesforce violated ERISA by not choosing the lowest-cost investment options for the $2 billion plan, such as passively managed mutual funds, collective investment trusts or cheaper share classes of the funds already on the menu.
A judge in U.S. District Court for the Northern District of California dismissed the complaint last October, though the plaintiffs were allowed to file an amended version to address the shortcomings identified by the court. At the time, the judge noted that comparing passively managed funds to similar actively managed ones was insufficient to state a claim for relief, as was the comparison between mutual funds and CITs. Further, pointing to low returns over a five-year investment horizon was not a long enough time frame to show imprudence on the part of Salesforce, the order noted.
In the amended complaint, Capozzi Adler added fee comparisons between funds available within the plan and those listed in the Investment Company Institute’s category averages. However, that addition was still too little to support a claim of imprudence, the judge wrote in the April 15 order.
Similarly, the share-class allegations were little changed in the amended complaint, and the judge noted that differences in fees were difficult to compare, as some of the funds on plan menu included costs to pay the record keeper, the order noted.
The claims were dismissed without the option of amending the complaint, meaning that the plaintiffs would have to appeal the ruling to a higher court or accept the dismissal.
Medical-supply and hygienic-product maker Kimberly-Clark was sued this month over allegedly excessive administrative fees in its $4 billion 401(k) plan.
Between 2015 and 2019, participants paid an average of $78 per person for record keeping and other expenses, which was more than double the “reasonable” rate of about $30 per person in a comparably sized plan, according to the April 15 complaint.
The plan fiduciaries did not opt for a fixed-rate fee model and “instead of using only one [provider], defendants cobbled together services from many providers, which often leads to a duplication of services and higher fees with no additional benefit to plan participants,” the plaintiffs stated in the complaint.
Law firms Kendall Law Group and Walcheske & Luzi brought the case, which was filed in U.S. District Court in the Northern District of Texas Dallas Division.
The complaint claims breaches of duty of loyalty and prudence under ERISA as well as failure to adequately monitor other fiduciaries.
Kimberly-Clark declined to comment, citing a practice of not doing so on litigation.
John Hancock Life Insurance on Wednesday reached a settlement over a lawsuit over the use of its own products in the company’s 401(k) plan.
Terms of the agreement were not provided to the court, although the parties indicated they had reached a settlement in principal. The dollar amount of the settlement would be submitted to the court once an agreement is finalized.
The firm was sued in February 2020 by a participant in the plan, represented by law firms Block & Leviton and Nichols Kaster. The class-action complaint alleged that the firm engaged in self-dealing, to the detriment of plan participants, by including its own funds on plan menu, rather than lower-cost, higher-performing options from third parties.
The plaintiffs pointed to multiple investments within the plan, including the company’s target-date series. Numerous investment providers have similarly been sued over the use of their own products in their 401(k) plans.
Plan sponsors can make strong legal arguments for the inclusion of proprietary funds within their 401(k)s, though they benefit from showing a well-documented prudent process in vetting the products.
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