Deutsche Bank 401(k) Self-Dealing Suit Moves Forward

A federal judge found that allegations regarding the assessment of excessive fees from which defendants stood to gain are sufficient to support the inference that the process used to select and maintain the plan’s investment options was “tainted by failure of effort, competence, or loyalty.”

In a lawsuit alleging that Deutsche Bank and other defendants violated their fiduciary duties by offering in its 401(k) plan proprietary, high-cost investments that profited the bank, U.S. District Judge Lorna G. Schofield, of the U.S. District Court for the Southern District of New York, mostly tossed the defendants’ motion to dismiss.

Schofield first rejected the defendants argument that the lawsuit, filed in December 2015, was time-barred by the Employee Retirement Income Security Act’s (ERISA)’s three-year and six-year statutes of limitation.

Concerning the three-year statute of limitation, the defendants argued that employees had knowledge of the offering of the proprietary funds and their fees by plan disclosures throughout the years. However, the judge noted that the plaintiffs could not have known about poor performance or excessive fees unless they had something to compare it to, and the complaint stated the plaintiffs did not have knowledge of this until shortly before filing the lawsuit in December 2015.

As for the six-year limitation period, the defendants argue that the claims are time barred because the only transaction allegedly prohibited under U.S. Code Section 1106 was the initial decision to include the proprietary funds in the plan, and the proprietary funds were all initially selected “well over six years ago.” Schofield says this argument fails as it does not accurately characterize the allegations in the complaint. The complaint alleges that the relevant prohibited transactions were the “shareholder service fees” paid in exchange for investment management services, and not the selection of the proprietary funds.

NEXT: The allegations

According to the plaintiffs’ complaint, the Deutsche Bank Matched Savings Plan, as of 2009, had roughly $1.9 billion in assets and offered participants 22 “designated investment alternatives,” ten of which were “proprietary Deutsche Bank mutual funds.” The core of the complaint’s allegations concerns the inclusion of Deutsche Bank proprietary mutual funds among the plan’s offerings. According to the complaint, “Deutsche Bank earned millions of dollars in investment management fees by retaining [these proprietary mutual funds] in the Plan.”

The complaint specifically alleges that the plan included three proprietary index funds that charged excessive fees in relation to other comparable index funds managed by the Vanguard Group. The complaint also asserts that the plan included actively-managed proprietary funds that charged investment management fees two- to five-times higher than other “actively managed funds in the same style,” and not only did these proprietary funds have higher fees, but they also consistently underperformed as measured by benchmark indices. The complaint asserts that, regarding two of the proprietary funds in particular, the plan was the only defined contribution plan among roughly 1,400 such plans with more than $500 million in assets to hold these funds.

Plaintiffs allege that the plan further failed to include the least expensive share class for each of its offered proprietary funds. They say that, given the amount of assets it held, the plan would have been eligible to offer the share classes with the lowest expense ratios for several proprietary funds, but that the plan failed to make such options available. In addition, the plaintiffs say the defendants “failed to adequately investigate non-mutual fund alternatives such as collective trusts and separately managed accounts.” The complaint claims that Deutsche Bank offers its institutional clients these other types of investment accounts, which are in “the same investment style” as the plan’s proprietary funds but have expense ratios that are 30% to 40% lower.

NEXT: Failure to state a claim arguments dismissed

Schofield rejected defendants’ contention that the complaint fails to state a claim for breach of fiduciary duty. Even where a plaintiff’s allegations “do not directly address the process by which the Plan was managed, a claim alleging a breach of fiduciary duty may still survive a motion to dismiss if the court, based on circumstantial factual allegations, may reasonably infer from what is alleged that the process was flawed,” the opinion states. These specific allegations regarding excessive fees from which defendants stood to gain is sufficient to support the inference that the process used by the defendants who were plan fiduciaries to select and maintain the plan’s investment options was “tainted by failure of effort, competence, or loyalty,” she concluded.

She also rejected defendants’ argument that plaintiffs have failed to state prohibited transaction claims under U.S. Code Section 1106 because the alleged transactions are covered by certain statutory exemptions. Schofield found this argument unavailing because it is not clear from the face of the complaint or judicially noticed court filings that any exemption applies. She notes that a defendant bears the burden of showing that an exemption to Section 1106 applies, and defendants in this case failed to do that.

Finally, Schofield did dismiss Deutsche Investment Management Americas Inc, RREEF America, LLC, DeAWM Service Company and Deutsche Bank AG as defendants, finding they are not fiduciaries to the plan.

The opinion in Moreno v. Deutsche Bank Ams. Holding Corp. is here.