A participant in the Aegon Companies Profit Sharing Plan has sued Aegon USA, some of its subsidiaries and trustees of the plan, alleging they violated the Employee Retirement Income Security Act (ERISA)’s requirement to act for the best interest of plan participants.
The complaint says that the defendants burdened the plan with layers of superfluous fees; that the plan pays fees higher than its peers; and that the fees go mostly to Aegon, which serves as recordkeeper and investment manager for the plan through its affiliates Transamerica Asset Management, Transamerica Financial Life Insurance Co., and Diversified Retirement Corp.—now rebranded as Transamerica Retirement Solutions.
In a statement to PLANSPONSOR, the company said: “Reflecting our core mission, Aegon and Transamerica provide retirement plans and matching contributions to our employees to help them prepare for a secure and confident retirement. We remain deeply committed to fair and transparent communications with our employees regarding fees and expenses associated with employees’ retirement plans.
“Our business complies with all applicable state and federal statutes and regulations, and participates in periodic regulatory reviews. The allegations asserted against the Aegon/Transamerica employees’ retirement plan are without merit.”
According to the court document, Aegon has placed many of its investment products in the plan, including at least 16 Aegon-managed investments in collective trusts or pooled separate accounts. These trusts and accounts charge investment management and portfolio administration fees for managing the securities in the portfolio. However, the lawsuit alleges, the manager of each of the collective trusts and pooled separate accounts does not manage a portfolio. Instead, each such commingled fund simply reinvests in an Aegon mutual fund of the same asset class and strategy, which, the complaint says, has the effect of layering a superfluous and excessive investment management fee on top of the fees charged to the mutual fund. Aegon collects this fee.
The lawsuit also alleges that Aegon does not manage the portfolios of the underlying mutual funds, but hires subadvisers to manage the portfolios, yet it charges a substantial adviser fee for picking a subadviser to do the portfolio management. The suit says this is another superfluous fee on the plan for Aegon’s benefit.
Aegon also has included its stable value fund in the plan. The stable value fund has opaque fee structures and credits interest to investors solely at the discretion of Aegon, the lawsuit says, alleging that the wild swings in the crediting rate within a given year under the stable value fund demonstrate that the crediting rate is not tied to market performance but, rather, to benefit Aegon, where it sets the crediting rate arbitrarily and based on whatever spread it wants to collect between the crediting rate and its return on investment (ROI).
The court document also says that Aegon, as recordkeeper to the plan, does not require all revenue-sharing payments that exceed the recordkeeping costs of the plan to be rebated to the plan. Instead, it has kept those payments, which, the suit alleges, exceeded reasonable fees by hundreds of thousands of dollars annually. In addition, Aegon allegedly keeps any interest earned on cash proceeds from liquidated participant accounts—called float income—and uses that money to purportedly pay plan expenses.
The lawsuit charges that rather than fulfilling its ERISA fiduciary duties by offering the plaintiff and other participants in the plan prudent investment options at reasonable cost, the defendants acted out of a conflict of interest and selected for the plan, and repeatedly failed to adequately monitor and remove or replace, Aegon-managed investment products with excessive fees.
The complaint says a prudent and loyal fiduciary for a mega plan—such as Aegon’s over $1 billion plan—uses the bargaining power of the plan to negotiate low fees from investment managers.
The plaintiff cites a BrightScope and Investment Company Institute publication that says mega plans have a median asset-weighted total fee of 30 basis points (bps). This includes investment management fees, administrative fees and other fees such as insurance charges. According to the complaint, the Aegon plan paid weighted average fees of more than 160 basis points in each year of the period relevant to the lawsuit on its investments in the Aegon separate accounts alone.
This is triple the amount paid by other $1 billion plans, even in the 90th percentile of high fees reported in the Investment Company Institute report, the plaintiff estimates, and this does not include additional insurance charges or administrative fees, or fees charged by the stable value fund or the diversified collective trust.
The lawsuit says the exorbitant fees paid by the plan to Aegon are reflected in the plan’s investment returns, which are net of fees. According to a report generated by a service called Retirement Plan Prospector, as of year-end 2013, the plan’s five-year rate of return as compared with plans of similar asset size is -175.58%. The plan’s three-year return as compared with peer plans is -405.31%.
The lawsuit asks the court to order defendants to disgorge all fees received from the plan, directly or indirectly, and profits thereon, and restore all losses suffered by the plan caused by the breaches of ERISA fiduciary duties, as well as pay equitable restitution and other appropriate equitable monetary relief.
The complaint in Dennard v. Aegon USA is here.