Lawsuit Calls Into Question Reasons for Fund Changes

Plan participants allege prohibited transactions between a plan sponsor and its investment manager relating to a revamp of the plan's investment lineup.

Participants in the Schneider Electric 401(k) Plan have sued plan fiduciaries and Aon Hewitt Investment Consulting for breach of fiduciary duties and prohibited transactions under the Employee Retirement Income Security Act (ERISA).

In an email, Aon Hewitt said, “As a matter of company policy, we don’t comment on litigation matters.” Schneider Electric has not yet responded to a request for comment.

According to the complaint, instead of acting in the exclusive best interest of participants, the defendants selected and retained proprietary Aon Hewitt collective investment trusts (CITs) that only benefited Aon Hewitt, including by investing more than $3 billion of participants’ retirement savings in the newly created and untested Aon Hewitt Index Retirement Solution target-date funds (TDFs). The complaint also said that instead of using the plan’s bargaining power, the defendants caused unreasonable expenses to be charged to the plan and participants for recordkeeping, investment management and managed account services.

The court document said that in January 2016, Schneider Electric and the plan’s investment committee contracted with Aon Hewitt to be the discretionary investment manager for the plan. In February 2017, Aon Hewitt completely restructured the investment lineup for the plan and three other Schneider Electric benefit plans: the Schneider Electric USA Inc. Coordinated Bargaining Employees’ Retirement Savings Plan, the Industrial Repair Services 401(k) Plan, and the Schneider Electric Supplemental Defined Contribution Plan.

Besides using Aon Hewitt’s proprietary funds in the new lineup, the plaintiffs claim that the plan’s Aon Hewitt funds were new investment options with no performance history. They were created by Aon Hewitt in “partnership with Schneider Electric.”

The complaint explains that as a non-depository bank, Aon Trust Company LLC maintains the Aon Hewitt collective investment trusts and is the trustee of the funds. Both Aon Trust Company and Aon Hewitt are wholly owned subsidiaries of Aon Consulting Inc. Aon Trust Company hired Aon Hewitt as the investment adviser to perform investment advisory and investment management services with respect to each fund. Both Aon Trust Company and Aon Hewitt charge a fee for their respective trustee and investment advisory services.

The plaintiffs allege that, as the investment adviser of these collective investment trusts, Aon Hewitt had a direct conflict of interest between acting in the exclusive best interest of plan participants as the plan’s discretionary investment manager while also seeking to grow its collective investment trust business and maximize its revenue through investment advisory fees. The complaint says the investment of plan assets in Aon Hewitt’s proprietary funds resulted in Aon Hewitt earning more than $600,000 annually in additional revenue.

The defendants are also accused of using plan participants’ retirement assets to seed the untested Aon Hewitt Index Retirement Solution target-date funds at the expense of plan participants. The plaintiffs say there was no loyal or prudent reason to replace the Vanguard target-date funds previously used in the plan. They also contend that without a performance history to consider in evaluating the merit of the Aon Hewitt index target-date funds, the defendants could not make a reasoned determination that these funds were prudent or in the best interest of plan participants compared to Vanguard’s target-date funds. “Selecting investment options for plan participants that have no performance history is imprudent,” the complaint states. It also says adding the funds violated the plan’s investment policy statement (IPS).

The defendants are accused of making sure the new target-date funds were seeded with participant assets by mapping those in a removed fund that did not make a new investment election to one of the target-date funds and by making the funds the plan’s qualified default investment alternative (QDIA). “It is well known in the investment industry that when plan fiduciaries eliminate a fund and transfer (or map) the assets to another fund, few 401(k) participants undo that movement because participants rarely make trades in their plan account,” the complaint states.

The plaintiffs attempt to prove their point by noting that as of December 31, 2016, only $975.2 million was invested in the plan’s existing Vanguard target-date funds, but by December 31, 2017, more than $3 billion of the plan’s $3.9 billion in assets (or 77%) was invested in Aon Hewitt’s target-date funds.

The complaint also says at the time of selection, the Aon Hewitt index target-date funds charged up to 33% more than the Vanguard Retirement Trust target-date funds. Based on the amount invested in the Aon Hewitt index target-date funds as of December 31, 2017, participants paid almost $500,000 each year in additional expenses, according to the lawsuit. The plaintiffs add that the Aon Hewitt target-date funds are even more expensive now.

It is also alleged that from their inception, the plan’s Aon Hewitt Index Retirement Solution Funds have significantly underperformed and continue to underperform the Vanguard Target Retirement Trust Plus funds that were removed from the plan. And defendants are also accused of causing the plan to invest in proprietary actively managed Aon Hewitt funds with insufficient performance track records.

According to the complaint, the Schneider Electric defendants exercised their discretionary authority over the plan’s investments in October 2017 by adding to the plan five Vanguard index mutual funds that Aon Hewitt previously removed from the plan. However, the Schneider Electric defendants selected the higher-cost institutional shares rather than the lower-cost Institutional Plus shares that were available and were previously provided to participants with respect to four of the funds.

In addition, the Schneider Electric defendants assessed a separate asset-based “recordkeeping expense” (1 basis point) on the Vanguard index mutual funds, which was paid to Aon Hewitt purportedly for overseeing and monitoring the Vanguard index funds. Participants were not charged a separate asset-based expense when the Schneider Electric defendants provided the lower-cost shares of the index funds prior to 2017.

The plaintiffs also allege a quid-pro-quo relationship between Schneider Electric and Aon Hewitt. They say “it is evident that the Schneider Electric defendants allowed Aon Hewitt to add its proprietary funds to the plan for Aon Hewitt’s interest and not for the exclusive interest of plan participants, and, in return, Aon Hewitt reduced the cost to Schneider Electric of the corporate benefits plans for which Schneider Electric was liable. Following the 401(k) plan’s 2017 fund changes, Aon Hewitt-affiliated entities substantially reduced the expenses charged on Schneider Electric’s corporate pension plans. According to the Forms 5500 for the Coordinated Bargaining Pension Plan, Aon Consulting reduced its compensation for the corporate plan by 31% in 2017, and 70% in 2018, compared to the expenses paid in 2016. For the Schneider Electric Pension Plan—paid for by the company, Aon Consulting reduced its expenses by 38% in 2017, and 79% in 2018, compared to the expenses paid in 2016. The additional revenue that Aon Hewitt collected from the plan’s investment in the Aon Hewitt collective investment trusts more than offset the reduction in expenses charged to the Schneider Electric pension plans. Thus, plan participants subsidized Schneider Electric’s corporate expenses,” the complaint states.

In addition to equitable relief, the plaintiffs are asking the court to order the defendants to:

  • reform the plan to include only prudent investments;
  • reform the plan to obtain bids for recordkeeping and to pay only reasonable recordkeeping expenses; and
  • reform the plan to obtain bids for managed account services and to pay only reasonable managed account service fees if the fiduciaries determine that a managed account services is a prudent alternative to target-date or other asset allocation funds.