Claims in Excessive Fee Suit Against Prudential Tossed

A court found Prudential was not acting as a fiduciary and an employer’s 401(k) plan menu and use of an investment selection tool were appropriate.

A federal judge has dismissed complaints against Prudential Retirement, an employer and its adviser in an excessive fee suit.

The participant who brought the proposed class action alleged that certain fees, including revenue-sharing payments, were kickbacks from mutual funds to Prudential. He also claimed that the 401(k) plan sponsored by Ferguson Enterprises included too many actively managed funds with higher fees than passively managed funds. Finally, he also accused a program offered by Prudential called GoalMaker, an optional program within the plan that assisted individual plan participants in making their investment selections, of directing participants to place their investments into higher-cost mutual funds that engaged in revenue-sharing with Prudential, resulting in additional compensation being paid to Prudential at the expense of the plan and plan participants.

U.S. District Judge Victor A. Bolden of the U.S. District Court for the District of Connecticut first determined that Prudential was not a fiduciary with respect to the lawsuit’s allegations. Prudential did not have the contractual authority to delete or substitute mutual funds from its menu without first notifying Ferguson and ensuring its consent. In addition, Bolden found that the trust agreement strips Prudential of its discretionary authority over its own compensation, limiting Prudential‘s compensation to the fee schedule provided to the employer and requiring advance notice to the employer of any changes to the agreed-upon schedule.

Concerning Ferguson and CapFinancial (doing business as CAPTRUST), Bolden ruled that the plaintiff has not made any allegations directly addressing the methods used by Ferguson and CapFinancial to select investment options for the plan. And, the plaintiff makes no allegations that the funds in the plan underperformed, instead stating broadly that the concentration of mutual funds imposes unwanted expenses on plan participants without including any factual allegations regarding the availability of lower-cost alternatives.

NEXT: Attempt to move to zero revenue-sharing not compatible with ERISA

Bolden ruled that the Ferguson 401(k) plan ultimately offered a variety of investment options that included low-cost options, with expense ratios ranging from 0.04% to 1.02%. As of October 2014, the Ferguson Plan was offering sixteen total investment options, fourteen of which were mutual funds. Of these fourteen mutual funds, eleven were actively-managed and three were passively-managed. The Ferguson Plan did include several investment options that were made available to plan participants as alternatives to the higher-cost actively-managed mutual funds, including a Vanguard Institutional Index Fund, a Group Fixed Annuity option and a Prudential Stable Value option.

Regarding the GoalMaker product, Bolden found plan participants were provided with detailed information regarding the exact investments included within GoalMaker along with information pertaining to the fees involved with each of these investments. In addition, he noted it is undisputed that the GoalMaker program was optional for plan participants, and it did not offer any investment selections that were not already included in the broader menu of investment options.

Bolden added in his opinion that, in light of the legal insufficiencies discussed in connection with the plaintiff’s claims, further amendment of the amended complaint would be futile. At oral argument, plaintiffs described this case as part of a series of cases intended to move the entire industry… more and more to zero revenue sharing, based on the notion that zero revenue sharing is much less expensive for plans and for participants. Bolden said these goals, however worthwhile they may be, are not compatible with the purposes of the Employee Retirement Income Security Act (ERISA).

“While plaintiffs seek to transform the market itself by challenging the very framework of revenue sharing in this industry, ERISA protects plan participants‘ reasonable expectations in the context of the market that exists,” he wrote.