Compliance

American Century Self-Dealing Suit Permitted to Proceed

The underlying complaint suggests the retention of American Century's proprietary mutual funds in its own 401(k) has cost plan participants millions of dollars in excess fees.

By John Manganaro editors@assetinternational.com | March 02, 2017

A ruling coming out of the U.S. District Court for the Western District of Missouri, Western Division, allows a self-dealing lawsuit filed by participants in American Century’s retirement plan to proceed.

According to the complaint, the retention of proprietary mutual funds in favor of outside investment options in the 401(k) has cost plan participants millions of dollars in excess fees. As an example, it says, in 2013, the plan’s total expenses were 48% higher than the average retirement plan with between $500 million and $1 billion in assets. The plan had $577 million in assets as of the end of 2013.

The plaintiffs, former employees of American Century Investment Management (ACIM), attribute the plan’s high costs almost entirely to American Century’s selection and retention of high-cost proprietary mutual funds as investment options within the plan, their failure to select the least expensive share class available for the plan’s designated investment alternatives, and their failure to monitor and control recordkeeping expenses. Plaintiffs also accuse the company of failing, in a timely manner, to remove certain funds after it became clear they were imprudent because doing so would cause the firm to lose millions of dollars in investment management fees it received by retaining them.

The complaint also notes that in July 2013, American Century began offering R6 shares for 22 of the funds offered by the plan. Although these R6 shares were 5 to 15 basis points less expensive than the institutional shares held by the plan, American Century failed to move the plan’s investments to this new share class until sometime in 2014. “The Plan’s failure to timely switch to R6 shares was particularly beneficial to ACIM, which collects higher fees from Institutional shares than R6 shares. For example, ACIM receives an annual fee of 80 basis points for performing investment advisory and management services for the American Century Heritage Fund. ACIM performs the exact same functions for holders of R6 shares, but receives an annual fee of only 65 basis points,” the lawsuit states.

Regarding recordkeeping fees, the complaint notes that in 2011, the plan had 2,253 participants. Plaintiffs contend a similarly sized plan would have been able to obtain “excellent recordkeeping services for between $50 and $60 per participant, or between approximately $112,700 and $135,000.” But, based on information in the plan’s 2011 Form 5500s, the plaintiffs estimate the plan’s recordkeeper at the time received approximately $800,000 in revenue-sharing dollars. “This is a grossly excessive amount—approximately six to seven times what a prudent fiduciary would have paid,” the lawsuit contends.

Beyond denying the various allegations outright, American Century responded by arguing that all of the plaintiffs’ claims are either barred by the three-year statute of limitations or fail entirely to state a claim for relief. In the first case, regarding the statute of limitations, American Century, among other arguments, stated that the plan had “not materially changed in the last three years.…Only American Century funds have been offered, the costs have not changed, and specific funds have underperformed.” Defendants thus argue, because the plan has not changed in the last three years and it is “apparent” the plan only includes American Century funds, that plaintiffs had actual knowledge of their claim more than three years ago.  

The judge ruled this argument fails because it “mischaracterizes plaintiffs’ allegations. Plaintiffs do not complain the mere offering of proprietary funds caused a breach of fiduciary duty. Rather, they argue that "the process to review, retain, and remove funds from the plan’s investment lineup was disloyal and self-serving, and given the fees and performance of the plan’s funds as compared to similarly available funds, the proprietary funds were an imprudent investment.”

On a motion to dismiss, “the complaint should be read as a whole, not parsed piece by piece to determine whether each allegation, in isolation, is plausible,” the judge observes. "Even when the complaint does not allege facts showing specifically how the fiduciaries breached their duty through improper decision-making, a claim can survive a motion to dismiss if the court may reasonably infer from what was alleged that the fiduciaries followed a flawed process."

After extensive argumentation, the judge observes, "reading the allegations in light most favorable to plaintiffs and viewing the allegations in their totality, the court finds the allegations state a claim for breach of fiduciary duty."

American Century did win one small victory, in that a certain subset of claims asserted by one lead plaintiff were denied on summary judgement, due to issues related to the timing of key severance agreements impacting employee benefits, as outlined in this document.

The main case decision is outlined here