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
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
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.