Compliance

Self-Dealing Lawsuit Filed Against Charles Schwab

The complaint alleges that defendants “reaped significant fees and profits at the expense of the plan and its participants.”

By Rebecca Moore editors@strategic-i.com | January 23, 2017
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A class action Employee Retirement Income Security Act (ERISA) lawsuit has been filed against Charles Schwab Corporation and its retirement plan fiduciaries alleging fiduciary breaches and prohibited transactions.

The lawsuit claims plan fiduciaries engaged in the imprudent and disloyal exercise of their discretionary fiduciary authority over the plan to include Schwab’s own affiliated investment products as investment options within the plan and sale of their own services to the plan. The complaint alleges that defendants “reaped significant fees and profits at the expense of the plan and its participants.”

In a statement to PLANADVISER, Charles Schwab said, “It’s our practice not to comment on pending litigation. However, we intend to vigorously defend against this case, and believe it is totally without merit. We are committed to helping employees save for retirement by providing a 401(k) plan with low-cost investment products and independent personalized advice.”

At issue in the case are several types of Schwab Affiliated Products and Services, categorized as: the “Affiliated Funds,” the “Schwab Savings Account,” the “Self-Directed Brokerage,” and the “Interest Free Loan from Unallocated Plan Cash.”

The lawsuit accuses plan fiduciaries of making no meaningful investigation into whether these Schwab Affiliated Products and Services were prudent for the plan, or whether alternative funds offered by other providers would be more appropriate, cost effective or better performing. Instead, the complaint says they “imprudently and disloyally elected to provide the Schwab Affiliated Products and Services to the Plan in an effort to generate fees for the Schwab Entity Defendants at the expense of the Plan and its participants.” The lawsuit says the fees were excessive, unreasonable and far exceeded the real costs associated with administering the plan.

The compliant pointed out a 3 to 5 basis point difference in fees between the Schwab S&P 500 Index Fund and the other S&P 500 Index funds. It said while that “may seem small at first glance, the plan had more than $100 million invested in the Schwab S&P 500 Index Fund each year during the class period, meaning the plan paid hundreds of thousands of dollars in fees more to Schwab than it would have paid to other fund providers even when not compounded.”

The lawsuit noted that since 2011, the fees for Schwab’s S&P 500 Index Fund have remained the same, while the fees for many of its competitors’ S&P 500 index funds have declined. In addition, other new S&P 500 index funds are now offered with lower fees than charged by the Schwab S&P 500 Index Fund. “Thus by 2015, numerous S&P 500 index funds with lower costs and better performance than the Schwab S&P 500 Index Fund were available on the market,” the complaint says.

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