A proposed class action lawsuit has been filed against iHeart Communications, its board of directors and its retirement benefits committee alleging excessive investment and recordkeeping fees for its 401(k) plan.
According to the complaint, from August 19, 2014, through the date of judgment on the case, the plan had at least $890 million in assets under management (AUM), with more than $1 billion in AUM at the end of 2017 and 2018. The plaintiffs argue that as a jumbo plan, fiduciaries had substantial bargaining power regarding the fees and expenses that were charged against participants’ investments.
“Defendants failed in their fiduciary duties either because they did not negotiate aggressively enough with their service providers to obtain better pricing or they were asleep at the wheel and were not paying attention,” the lawsuit states.
The plaintiffs accuse the defendants of failing to objectively and adequately review the plan’s investment portfolio with due care to ensure that each investment option was prudent, in terms of cost, and of maintaining certain funds in the plan despite the availability of identical or similar investment options with lower costs and/or better performance histories.
In many instances, the defendants failed to use the lowest cost share class for many of the mutual funds within the plan, and failed to consider certain collective trusts available as alternatives to the mutual funds, despite their lower fees and materially similar investment objectives, the lawsuit alleges.
“One indication of defendants’ failure to prudently monitor the plan’s funds is that the plan has retained several actively managed funds as plan investment options despite the fact that these funds charged grossly excessive fees compared with comparable or superior alternatives, and despite ample evidence available to a reasonable fiduciary that these funds had become imprudent due to their higher costs relative to the same or similar investments available,” the complaint also states.
Using a chart, the complaint shows the expense ratios for a majority of the mutual funds in the plan—at least 14 of the plan’s 22 mutual funds—were more expensive than the Investment Company Institute (ICI) median for the same category of fund.
The plaintiffs allege that a prudent fiduciary conducting an impartial review of the plan’s investments would have identified the cheaper available collective trusts and transferred the plan’s investments into those at the earliest opportunity. “Given that the collective trusts were comprised of the same underlying investments as their mutual fund counterparts, and managed by the same investment manager, but had lower fees, they generally had greater returns when looking at the one-, three-, five- and 10-year average annual returns. Moreover, the plan did not receive any additional services or benefits based on its use of more expensive funds; the only consequence was higher costs for plan participants,” the complaint states.
Regarding the use of higher-cost share classes, the complaint cites the court in Tibble v. Edison, which observed that “because the institutional share classes are otherwise identical to the investor share classes, but with lower fees, a prudent fiduciary would know immediately that a switch is necessary. Thus, the manner that is reasonable and appropriate to the particular investment action, and strategies involved … in this case would mandate a prudent fiduciary—who indisputably has knowledge of institutional share classes and that such share classes provide identical investments at lower costs—to switch share classes immediately.”
Finally, the lawsuit claims the structure of iHeart’s plan is rife with potential conflicts of interest because Fidelity and its affiliates were placed in positions that allowed them to reap profits from the plan at the expense of participants. The plan’s trustee is Fidelity, and an affiliate of Fidelity performs the recordkeeping services for the plan.
“This conflict of interest is laid bare in this case where lower-cost Fidelity collective trusts and index funds—materially similar or identical to the plan’s other Fidelity funds (other than in price)—were available but not selected because the higher-cost funds returned more value to Fidelity,” the complaint states.