David G. Feinberg, a participant in the T. Rowe Price U.S. Retirement Program, has filed a lawsuit on behalf of the 401(k) plan and all similarly situated plan participants and beneficiaries, as well as all predecessor plans, accusing the firm of self-dealing.
According to the complaint, the defendants favored the economic interests of T. Rowe Price Group, Inc. and its affiliates over the interests of their employees in saving for their retirement. “Defendants did so by offering, during the Class Period (February 14, 2011 through judgment in this case), only T. Rowe Price’s own in-house investment funds in its 401(k) Plan. This exclusive relationship provided a windfall to T. Rowe Price affiliates T. Rowe Price Associates, Inc. and T. Rowe Price Trust Company,” the lawsuit says. These affiliates serve as investment advisers for those funds and collect the fees charged to investors in those funds.
The lawsuit alleges the defendants failed to loyally and prudently monitor the fees and performance of 401(k) plan investment options, and simply retained the in-house funds to enrich T. Rowe Price.
In a statement to PLANADVISER, T. Rowe Price said: “We believe the suit is without merit and intend to defend vigorously.”
The lawsuit also accuses the defendants of frequently offering the higher cost retail class versions of their mutual funds in the 401(k) plan despite the fact that significantly cheaper versions of these funds were available, including institutional share classes, collective investment trusts, and separately managed accounts. In addition, the complaint says, “In those instances when cheaper alternatives to certain retail class mutual funds did not exist, Defendants could have used the fact that the 401(k) Plan was a large institutional investor as leverage in negotiations to create cheaper alternatives.”NEXT: Participants treated differently than commercial customers
The lawsuit says the defendants offered more expensive classes of collective investment trusts to 401(k) plan participants than they made available to their commercial customers. In addition, the complaint accuses defendants of offering investment management services for some of their collective investment trusts and institutional mutual funds to commercial customers as a sub-adviser for less cost than charged to the plan. “In so doing, Defendants provided the identical services to 401(k) Plan participants while using their role as fiduciaries to collect higher fees than they otherwise could from third-parties,” the complaint says.
The lawsuit claims that as a result of defendants’ fiduciary breaches and prohibited transactions under the Employee Retirement Income Security Act (ERISA), 401(k) plan participants were deprived of millions of dollars in retirement savings that they would have earned if funds had been selected irrespective of their affiliation.
As an example, the complaint suggests that if funds from other established fund companies, such as Vanguard Investments, had been used instead, participants' fees would have been reduced by $27 million or more during the class period. If such funds had, instead, been offered to participants in those asset classes and investment fund categories in which T. Rowe Price performance is weak, participants' earnings would have increased by $123 million or more.
The lawsuit also notes that at the inception of the class period, the 401(k) plan exclusively held T. Rowe Price proprietary funds, and almost all of these were the expensive retail class versions of T. Rowe Price mutual funds. It accuses the plan trustees of breaching their fiduciary duties under ERISA by either failing to remedy their predecessors’ breaches, or, in a few cases of offering expensive retail class versions of proprietary mutual funds, waiting too long to act to shift into lower cost versions of the funds.
The lawsuit seeks relief including disgorgement of all investment advisory fees paid to T. Rowe Price and/or its subsidiaries from 401(k) plan assets, as well as the difference in performance between readily available and better performing non-proprietary funds that could have been offered in the 401(k) plan. It says that during the class period, 401(k) plan participants paid TRP Associates in excess of $50 million in fees.