Compliance

401(k) Self-Dealing Suit Filed Against Capital Group

Selecting, retaining and failing to remove expensive group-affiliated investment options generated significant revenue for Capital Group and its subsidiaries, the lawsuit says.

By Rebecca Moore editors@strategic-i.com | June 15, 2017

D’Ann Patterson, individually and on behalf of all other similarly situated participants and beneficiaries of the Capital Retirement Savings Plan, has filed a lawsuit against The Capital Group Companies, Inc., the Board of Directors of Capital Group, the U.S. Retirement Benefits Committee of the plan, Capital Guardian Trust Company (CGTC), Capital Research and Management Company (CRMC) and Capital International, Inc. (CII) for violations of the Employee Retirement Income Security Act’s (ERISA)’s fiduciary duties and prohibited transaction provisions between June 13, 2011, and the present.                  

The lawsuit claims that when selecting and retaining investment options in the plan, the benefits committee did not act prudently and solely in the interest of plan participants and beneficiaries, but put the interest of Capital Group and its subsidiaries first by selecting, retaining and failing to remove expensive group-affiliated investment options managed by CGTC, CRMC, and/or CII.

The lawsuit says this generated significant revenue for Capital Group and its subsidiaries.

According to the complaint, during the relevant period, between 94.7% and 97.8% of all investments offered by the plan were “the unduly expensive Capital Group-affiliated investments managed by CGTC, CRMC and/or CII. The lawsuit claims there was access to comparable investment options from unaffiliated companies that cost less and have performed comparably, if not better than, the Capital Group-affiliated investment options.

In addition, it says the benefits committee selected and retained the more expensive R5 share class of the funds despite the availability of the less expensive R6 share class.

“The Committee’s conflicted, disloyal, imprudent, and self-interested decisions—and its failure to properly evaluate and monitor the plan’s investment options for both reasonable costs and performance levels through an impartial or prudent process—resulted in plan participants and beneficiaries paying excessive and prohibited fees that substantially diminished their retirement savings, and resulted in windfall profits for Capital Group and its subsidiaries,” the complaint says.

In addition, it says, the “decisions of CGTC with respect to the plan assets invested in the Capital Guardian Emerging Markets Equity Fund (a Capital Group-affiliated collective investment trust), for which plan assets CGTC was a fiduciary, also resulted in plan participants and beneficiaries paying excessive and prohibited fees that substantially diminished their retirement savings, and resulted in windfall profits for Capital Group and its subsidiaries, including CGTC.”

The lawsuit asks for disgorgement of the “ill-gotten gains” and to provide other appropriate equitable relief for participating in the fiduciary breaches of the board, the committee, and/or CGTC, as well as the prohibited transactions alleged.