Compliance

Morningstar and Prudential Deny Racketeering Claims

The complaint suggests the companies engaged in “Tammany-like” collusion to steer assets into more favorable investments; both providers have issued strong denials and requests for summary judgement. 

By John Manganaro editors@strategic-i.com | August 29, 2017
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Another ERISA lawsuit has emerged in federal court, this one naming both Morningstar and various Prudential companies as defendants in the U.S. District Court for the Northern District of Illinois.

The case is unique because it cites both the Employee Retirement Income Security Act (ERISA) and the Racketeer Influenced and Corrupt Organizations Law of 1970, known as RICO. The lead plaintiff in the would-be class action suit is an employee of Rollins Inc. and a participant in the Rollins retirement plan. The Rollins plan is a defined contribution retirement plan with assets of roughly $500 million and more than 10,000 participants and beneficiaries, case documents show. Defendants are investment analysts, investment-related software developers, investment consultants, recordkeepers and investment managers with respect to the Rollins Plan and other 401(k) retirement plans across the country.

Specifically, the suit is focused on the various groups that manage the plan participant-level automated investment advice program marketed under the tradename GoalMaker.

“Plaintiff and the other participants in the plans used and were injured by this innocuous-sounding investment advice program,” the suit contends, “which in reality was a predatory racketeering enterprise developed, maintained and marketed by defendants. Defendants’ so-called investment advice program gets retirement plan investors to turn over the investment management of their plan accounts to defendant PRIAC. PRIAC, along with its corporate siblings who facilitated the instant racketeering scheme, is a core part of the RICO racketeering enterprise at issue here.”

It should be noted straightaway that both Prudential and Morningstar have filed extensive responses to the suit denying the charges here described and requesting summary judgement against the plaintiff. And it is also relevant to observe that the GoalMaker product has been challenged unsuccessfully in a federal district court before by a disgruntled participant. In that case, which is not exactly parallel but has some important similarities, U.S. District Judge Victor A. Bolden of the U.S. District Court for the District of Connecticut found plan participants were provided with sufficiently detailed information regarding the exact investments included within GoalMaker along with information pertaining to the fees involved with each of these investments. In addition, he noted it is undisputed that the GoalMaker program was optional for plan participants, and it did not offer any investment selections that were not already included in the broader menu of investment options.

At oral argument in the Connecticut case, plaintiffs suggested their complaint should be seen as part of a series of cases intended to move the entire retirement planning industry to zero revenue sharing, based on the notion that zero revenue sharing is much less expensive and transparent for plans and for participants. Bolden said these goals, however worthwhile they may be, are not compatible with the strict purposes of ERISA. Bolden added in his opinion that, in light of the legal insufficiencies discussed in connection with the plaintiff’s claims, further amendment of the amended complaint would be futile.

NEXT: Examining the new complaint