Two investors have filed a lawsuit against State Farm Investment Management Corp., alleging that the firm violated its fiduciary duty by charging excessive fees on its line of LifePath target date funds.
The investors, Amy Ingenhutt and Teresa Odell, who are seeking relief on behalf of all shareholders in the funds, claim that State Farm received around $17.5 million, almost half of the management fees for the LifePath Funds, despite the fact that it did not provide a proportional share of services to the funds. The sub-adviser on the fund, Blackrock Inc., “provides virtually all of the investment advisory and
portfolio management services,” according to the complaint.
“The amount of the management fee extracted and retained from the LifePath Funds by State Farm is so disproportionately large that it bears no reasonable relationship to the services rendered (if any) in exchange for that fee,” the complaint states. “It is difficult to determine what management services, if any, State Farm provides to the LifePath Funds, since virtually all the investment management functions of the LifePath Funds are delegated to Blackrock.”
The five LifePath target date funds had around $6.25 billion in assets under management at the end of last year, according to the complaint, which cited the funds' 2015 annual report. Most of the fees carried a net management fee of 62 to 63 basis points, according to the complaint.
The suit also alleges that State Farm has benefited from “economies of scale” in that its fees have increased as the market performance has driven up assets under management, but that those benefits were not passed along to the shareholders.
“The work required to operate a mutual fund does not increase proportionately with the assets under management,” the complaint alleged. “These benefits can (at least in part) be shared with the LifePath Funds, plaintiffs and other shareholders in these funds by reducing fees and other costs charged to the funds.”
A spokesman for State Farm, Dave Phillips, said in an email that, “it is important to know that this lawsuit is only an allegation at this time.” He declined to comment further citing pending litigation.
There have been
a number of similar cases that have sought to challenge management fees, particularly on sub-advised funds, in recent years. Several cases have been brought recently against fund managers,
including a well-publicized case last year against BlackRock.
An attorney representing the plaintiffs in the case, Garrett Wotkyns with Schneider Wallace Kottrell Konecky Wotkyns, said his firm also has a case pending against Principal Management Corp. in district court in Iowa.
“That's where the rubber hits the road and [it's] the real question these companies have to face,” he said. “When we show with evidence that 'You, mister investment adviser, did a de minimis amount of work and in exchange received tens or hundreds of millions in management fees when all you did to earn that was select sub-advisers for your target date mutual funds and maybe print the prospectuses.'”
Total assets in target date funds were $811.2 billion in 2014, up around 28% from $632.3 billion in 2013, according to an annual survey of defined contribution money managers by
InvestmentNews' sister publication,
Pensions & Investments.
“They're a tremendously popular option for retirement investors,” said Mr. Wotkyns. “That makes it especially important that they not be charged excessive fees.”
In May last year, Niels Holch, who is the executive director of the Coalition of Mutual Fund Investors, a shareholder advocacy group,
said he was seeing a “plethora” of cases where fund companies where challenged on advisory fees after some cases made it beyond the motion-to-dismiss phase.
