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.
