Plan Sponsor Sues Principal over 401(k) Fund Revenue Sharing

The sponsor of a 401(k) plan for employees at an Illinois racetrack is suing Principal Financial Group for fiduciary breach over revenue sharing arrangements with mutual funds whose offerings are in Principal’s 401(k) product.

Joseph Ruppert, vice president of Fairmount Park Inc., which runs the Fairmount Park Racetrack in Collinsville, Illinois near St. Louis, alleged in the suit the revenue sharing practice violated the Employee Retirement Income Security Act (ERISA). Ruppert acts as trustee for the plan.

According to the suit, the violation occurred within Principal’s pre-packaged 401(k) product such as the one sold to Fairmount Park, Inc. for its Retirement Savings Plan.

In trying to build a case that Principal should be considered a fiduciary, the suit asserted the plan provider had “a special relationship of confidence, trust, or superior knowledge or control” with both plan sponsors and participants in Principal’s pre-packaged plans because the firm:

  • assumed responsibility to employers and employees to negotiate favorable investment management fees with mutual funds and their advisors arising from Principal’s exclusive control over the selection of mutual funds to be included in the pre-packaged plans,

  • held “itself out to employers and employees as highly-skilled financial experts, possessing special knowledge and expertise,”

  • encouraged employers and participating employees “to place their utmost trust and confidence in Principal’s management of their 401(k) plans,” and

  • assumed responsibility to provide unbiased expertise and 401(k) plan management to employers and employees.

The suit, which seeks certification as a class action on behalf of Principal 401(k) plans in which Principal uses revenue sharing, alleged that Principal breached its fiduciary duties by:

  • not disclosing the revenue sharing to the Fairmount plan or its participants; and

  • effectively violating ERISA’s prohibited transaction rule through “using plan assets to generate revenue sharing kickbacks for Principal’s own interest and for its own account.”

Not only that, but the revenue sharing fees Principal receives “bear no relationship to Principal’s costs of providing services to plans or participants” and are in addition to the fees Principal charges for those services, the suit claimed. Also, Ruppert charged affected plans and their participants do not get any additional services outside of those for which they already pay.

The complaint said Principal should have used its revenue sharing revenue “to defray the reasonable expenses of administering the plan.”

The Principal suit asked a federal judge to rule that revenue sharing violates ERISA, to prohibit Principal from accepting revenue sharing payments and to require Principal to return revenue sharing fees generated as part of Fairmount’s plan back to the plan.

Filed by East Alton, Illinois attorney Rosalind Robertson, the case has been assigned to US District Judge David Herndon of the US District Court for the Southern District of Illinois. The case is Ruppert v. Principal Life Insurance Co., S.D. Ill., No. 3:06-co-00903-DRH-PMF, complaint filed 11/8/06.

Last month, a Florida Sheriff’s Department sued Nationwide Life Insurance Co., over allegations Nationwide’s fees unfairly allowed the company to make a profit through its revenue sharing arrangement. The suit was filed by Orange County Sheriff Kevin Beary and charged that Nationwide, the agency’s former provider, would offer mutual funds to deputies and other investors only if the family of funds also paid the company a fee (See FL Sheriff Sues Nationwide Over Fees).

The general issue of plan fees has been a major hot button issue of late and has been the subject of numerous lawsuits including a recent one against a plan provider (See Deere Workers Hit Fidelity with Excessive 401(k) Fee Suit), as well as numerous others against plan sponsors (See Fee for All).

Principal spokeswoman Terri Hale responded Tuesday: “It is our policy not to comment on pending litigation. The Principal takes seriously our commitment to our plan sponsor clients and their participants and places the highest priority on providing excellent customer service.”