Compliance November 13, 2017

Nordstrom Charged With Allowing Excessive Fees in 401(k) Plan

The lawsuit also says plan fiduciaries failed to use lower cost investment vehicles and made inadequate disclosures to participants about fees.
Reported by

A participant in the Nordstrom 401(k) Plan has filed a proposed class action lawsuit against Nordstrom Inc. and its 401(k) plan committee for breach of fiduciary duties under the Employee Retirement Income Security Act (ERISA).

According to the complaint, with $2.6 billion in assets, the Nordstrom plan is one of the largest plans in the country, and as such, has enormous bargaining power to obtain low-cost administrative and investment management services. The suit notes that the overall trend among large 401(k) plans in the last decade has been for administrative fees to be reduced in half, but the Nordstrom plan administrative fees increased by 30% from 2011 to 2016, from $3,799,000 to $4,695,000.

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The lawsuit alleges that Nordstrom and its plan committee allowed unreasonable fees to be incurred by participants; it did not act prudently to lower costs; it failed to use lower cost investment vehicles; and it made inadequate disclosures about fees.

Specifically, the complaint says the administrative fees and trustee fees paid by the plan from 2011 to 2016 ranged from a low of $55.60 to a high of $66.56. It claims these fees are excessive and double the amount of reasonable fees. According to the complaint, a reasonable administrative and recordkeeping fee per person is $30. “The extra costs incurred by Nordstrom participants from 2011 to 2016 were $13.7 million,” it says.

In addition, the plaintiff alleges the fee disclosure Nordstrom provides fails to clearly tell participants if, in fact, their accounts will be charged for plan administrative expenses, and if so, how much. The plan, as a whole, paid administrative expenses of close to $26 million from 2011 to 2016, and this money directly reduced the amount of participant savings, the lawsuit says.

In addition, according to the annual Form 5500s filed by the plan with the U.S. Department of Labor, service providers to the plan received indirect payments from sources other than the plan or its sponsor, yet Nordstrom does not disclose to plan participants the amount of such revenue sharing payments, nor how the payments were applied, the participant alleges. “Without this information, it is not possible to determine whether the revenue sharing amounts were reasonable in relation to administrative costs,” the suit says.

NEXT: Investment options

According to the complaint, the annual operating fees charged for many of the plan’s investment options were substantially higher than reasonable management and operating fees of comparable funds. It says $1.9 billion of the plan’s assets were in investments costing on average at least 42 basis points (bps) in annual operating fees, which it says are up to 16 times higher than comparable index funds, and up to 2.7 times higher than comparable actively managed funds. The lawsuit says the high-fee funds in the plan could have been easily replaced by lower cost index funds, target-date retirement funds, or actively managed funds. In addition, the lawsuit alleges many of the funds chosen for the plan were newly formed and did not have extensive track records: Of 21 funds in the plan as of October 2016, only four had performance records going back 10 years, and only five had track records going back 5 years. A table in the complaint compares the fees for funds in the plan to allegedly similar Vanguard funds.

The complaint suggests the plan fiduciaries could have offered separately managed accounts to participants. “Separately managed accounts can use the same investment style and same manager as more expensive mutual funds. Separate accounts offer various benefits such as the ability of the Plan sponsor to negotiate fees, directly control investment guidelines, and to avoid paying marketing costs which are included in the cost of mutual funds, and not having to hold large amounts of cash for shareholder redemptions. Nordstrom failed to take advantage of this lower cost alternative,” it says.

Similarly, the complaint suggests plan fiduciaries could have selected collective investment trusts (CITs) for the plan. “Collective investment trusts provide yet another much lower cost investment option for Plan holdings. They are pooled tax exempt investment vehicles which are available for 401(k) plans and are cheaper than mutual funds. While a few of the Plan’s holdings were in collective trusts, the Plan failed to utilize this much cheaper option with respect to the $1.1 billion in Nordstrom Target Retirement Funds,” it says.

The lawsuit seeks to make good to the plan all losses resulting from the breaches of fiduciary duties, and to restore to the plan any lost investment returns. In addition, the plaintiff seeks to reform the plan to comply with ERISA and to prevent further breaches of fiduciary duties and other such equitable and remedial relief as the court may deem appropriate.

Compliance November 13, 2017

Franklin Templeton Targeted in Self-Dealing Fiduciary Breach Lawsuit

The self-dealing lawsuit filed against Franklin Templeton levels similar claims to other class-action challenges filed by employees of well-known financial services providers. 
Reported by

The latest self-dealing lawsuit filed against a financial services provider by its own in-house retirement plan participants challenges the offering of proprietary products within the plan.

Plaintiffs filed their complaint in the U.S. District Court for the Northern District of California, seeking class action certification on behalf of all similarly situated participants in the Franklin Templeton 401(k) retirement plan. Named as defendants are both the Franklin Resources Inc. company and the retirement plan’s fiduciary investment committee—the members of which are called out by name.

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The suit alleges that defendants “breached their fiduciary duties by causing the plan to invest in funds offered and managed by Franklin Templeton (Franklin funds), when better-performing and lower-cost funds were available.” The lead plaintiff further alleges that defendants were “motivated to cause the plan to invest in Franklin funds to benefit Franklin Templeton’s investment management business.” Further, the suit alleges that defendants “offered the plan inferior arrangements compared to that offered to non-captive plans, and, in so doing, engaged in prohibited transactions.”

Much of the text of the complaint looks familiar, as it mirrors similar suits filed in the last year against investment product providers. According to plaintiffs, the plan has some $750 million invested in mutual funds managed by Franklin Templeton and its subsidiaries. While use of proprietary products is a common practice among providers of mutual funds, plaintiffs argue in this case it is a violation of the fiduciary duty because “these investment options were chosen because they were managed by, paid fees to, and generated profits for Franklin Templeton and its subsidiaries.”

The complaint continues: “Over the relevant time period, over 40 mutual funds offered by the plan were, and continue to be, managed by Franklin Templeton or its subsidiaries. The plan also includes a company stock fund, which invests in common stock of Franklin Templeton, and a collective trust, managed by State Street Global Advisors, which is intended to track domestic large-capitalization stocks as represented in the S&P 500 Index. In 2015, the plan also added three other collective trusts, also managed by State Street Global Advisors, to offer index tracking for international stocks, domestic small and mid-capitalization stocks, and bonds.”

Plaintiffs suggest that, prior to 2015, the S&P 500 Index fund was the only passively managed, and only non-proprietary, option in the plan. The crux of the complaint is that, “at all times relevant herein, the proprietary funds charged and continue to charge plan participants and beneficiaries fees that were and are unreasonable for this plan. The fees charged were and are significantly higher than the median fees for comparable mutual funds in 401(k) plans as reported by the Investment Company Institute, in The Economics of Providing 401(k) Plans: Services, Fees and Expenses and by BrightScope, Inc., an independent provider of 401(k) ratings and data, based on its review of 1,667 large 401(k) plans reported in Real Facts about Target Date Funds.”

NEXT: Participants challenge revenue sharing arrangement 

The lawsuit also challenges certain revenue sharing practices engaged in by Franklin Templeton fiduciaries. According to plaintiffs, during the class period, because Franklin offered the plan lower shareholder service fees, the plan “both had to pay additional administrative fees to the plan’s recordkeeper and lost the opportunity to benefit from the reimbursement of fees to the plan for other purposes. At the same time, for other shareholders of the same Advisor share class of the proprietary funds, Franklin offers a 15 basis point beneficial owner servicing credit, which was also paid by Franklin Templeton Investors Services, LLC using fees collected from the Franklin mutual funds and reducing the value of the mutual funds for all shareholders, including the plan. The 15 basis point beneficial owner servicing credit was offered to Franklin-fund shareholders such as the Mercury General Corporation Profit Sharing Plan, but was not available to the [in-house] plan.”

The lawsuit continues: “Upon information and belief, other shareholders in the Advisor share class benefitted from the additional 15 basis points through payments to their advisers, including Franklin Templeton Institutional, LLC, the funds’ distributor, Franklin Templeton Distributors, Inc., or entities who had entered into selling agreements with Franklin Templeton Distributors, Inc.”

According to plaintiffs, had Franklin made this 15 basis points fee reduction available for the benefit of the in-house plan, as it did with other shareholders, the plan and Charles Schwab would have received beneficial owners servicing credits of approximately $1.1 million per year, an increase of $700,000 per year from the benefit offered by Franklin for its own plan.

“Conversely, had Franklin offered all shareholders the same arrangement as it had with Charles Schwab for the plan, the amount of the payments made from each fund would have been less, causing the value of the plan’s investments in the Franklin Funds to be higher,” plaintiffs argue.

Taking all the charges together, plaintiffs summarize what they see as the defendants’ motivation for taking the actions at issue here: “With an operating margin of over 37%, very high for the mutual fund industry, defendants made a fortune off of the plan’s investments in proprietary funds.”

Among various other points of content, the suit also calls out Franklin Templeton’s treatment of the plan’s qualified default investment alternative, suggesting the decision in 2014 to use newly created proprietary target-date funds was also made with the company’s, and not participant’s, best interest in mind. Plaintiffs also suggest the offering of a money market fund rather than a stable value fund has robbed participants of easily available returns.

In a statement to PLANADVISER, Franklin Templeton strongly denies the allegations: “This lawsuit, filed by the same law firm that filed the pending Cryer action against the company, names additional defendants and includes additional claims, but is premised on the same alleged set of facts and seeks duplicative relief. This second lawsuit follows the unsuccessful attempt by the plaintiff in Cryer to add these same additional claims and defendants. Franklin Templeton takes pride in its 401(k) plan, which offers a generous matching program and provides employees with a diversified line-up of investment choices, including proprietary and non-proprietary funds, and will defend against both lawsuits aggressively.”

The full text of the compliant is available here. 

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