Prudential faces a self-dealing lawsuit filed by participants in its defined contribution (DC) retirement plan, alleging various fiduciary breaches under the Employee Retirement Income Security Act (ERISA).
Filed in the U.S. District Court for the District of New Jersey, the ERISA complaint names as defendants the Prudential Insurance Company of America, the Prudential Employee Savings Plan Administrative Committee, the Prudential Employee Savings Plan Investment Oversight Committee, and some 20 “John and Jane Does.”
At a high level, the suit alleges that the Prudential defendants put the interests of the company ahead of those of the plan “by choosing investment products and pension plan services offered and managed by Prudential subsidiaries and affiliates, which generated substantial revenues for Prudential at great cost to the plan.”
The text of the complaint opens with a general recitation of the increasingly important role of DC plans in the U.S. retirement system relative to defined benefit pensions, which are slowly but surely declining in prominence. According to the complaint, the potential for disloyalty and imprudence is “much greater in defined contribution plans than in defined benefit plans.”
“In a defined benefit plan, the participant is entitled to a fixed monthly pension payment while the employer is responsible for making sure the plan is sufficiently capitalized. As a result, the employer bears all risks related to excessive fees and investment underperformance,” the complaint suggests. “Therefore, in a defined benefit plan, the employer and the plan’s fiduciaries have every incentive to keep costs low and to remove imprudent investments. But in a defined contribution plan, participants’ benefits are limited to the value of their individual accounts, which is determined by the market performance of employee and employer contributions, minus investment expenses. Thus, the employer has no incentive to keep costs low or to closely monitor the plan to ensure that selected investments are and remain prudent, because all risks caused by high fees and poorly performing investments are borne by the employee.”
The complaint goes on to suggest that, for financial services companies like Prudential, the potential for imprudent and disloyal conduct is especially high, because the plan’s fiduciaries are in a position to benefit the company through the selection of the plan’s investments by, for example, filling the plan with proprietary investment products that an objective and prudent fiduciary would not choose.
Details from the Complaint
After this generalized argumentation, the complaint offers more particular facts about the alleged wrongdoing on the part of Prudential defendants. Among other things, plaintiffs allege that the defendants violated ERISA by “overpopulating the plan with proprietary mutual funds offered by Prudential and its affiliates, failing to monitor the performance of those funds, and failing to adequately disclose the amount of recordkeeping fees received by Prudential, resulting in the payment of grossly excessive fees to Prudential and significant losses to the plan and its participants.”
According to the complaint, by selecting Prudential-affiliated funds, the defendants placed Prudential’s interests above the plan’s interests.
“Instead of considering objective criteria like fees and performance to select investments for the plan, the investment oversight committee selected Prudential funds because they were familiar and generated substantial revenues for Prudential,” the complaint alleges. “Unaffiliated investment products do not generate any fees for Prudential. As a result, the committee chose many Prudential funds to benefit Prudential, the sponsor of the plan, without investigating whether plan participants would be better served by investments managed by unaffiliated companies. This is unsurprising, given that Prudential serves as the plan’s recordkeeper, and the plan utilizes a revenue-sharing arrangement to pay the majority of its administrative expenses.”
According to plaintiffs, as Prudential itself performs all recordkeeping and administrative functions for the plan, as well as manages a significant number of the plan’s investments, Prudential receives additional revenue in the form of direct participant fees and indirect fees via revenue sharing.
“Exacerbating the problems arising from these severe conflicts of interest, several of the unaffiliated investment options offered to plan participants were egregiously expensive and generally underperformed compared to benchmarks selected by the investment oversight committee.
Other Cases Show Facts Matter Most
This is far from the first self-dealing lawsuit to be filed against prominent recordkeeping and investment product providers in recent years under ERISA. Just to name a few other providers, Transamerica, Morgan Stanley and Franklin Templeton have all faced self-dealing suits. The outcomes of those cases—some of them are still pending—shows the results of the new Prudential case will very much hinge on the facts discovered both ahead of and potentially after the summary judgement phase.
For example, in Transamerica’s case, a judge has denied the fiduciary defendants’ motion to dismiss a lawsuit accusing the company of retaining poorly performing proprietary fund portfolios in it 401(k) plan. In denying the dismissal motions from Transamerica, the judge in the case wrote that, “regardless of whether an investment is affiliated with the fiduciary, the fiduciary has an obligation to act prudently in monitoring the underlying investments.” Here, plaintiffs’ complaint sufficiently alleges that the selection and retention of “substandard investment portfolios” constituted imprudent conduct.
On the other hand, Morgan Stanley this year successfully argued for dismissal of a 401(k) plan self-dealing suit filed by one of its employees. In that matter, the court decided the plaintiffs did not have standing to sue regarding the funds in which they did not invest, and they did not sufficiently prove their other claims.
Franklin Templeton, for its part, chose to settle rather than continue to fight its own self-dealing challenge once a federal district court moved forward most of the plaintiffs’ claims. In the end, Franklin Templeton did not admit to any wrongdoing, but it still agreed to pay nearly $14 million in damages and to provide certain non-monetary relief in terms of the future operations of the plan.