Index Fund Designation Questioned in Latest Self-Dealing Lawsuit

The fund had an annual costs of 35 bps per year in the plans being targeted by the latest self-dealing lawsuit.

The retirement planning industry is facing a glut of self-dealing fiduciary breach lawsuits filed under the Employee Retirement Income Security Act (ERISA), including the latest complaint targeting two profit sharing plans offered internally to employees of the New York Life Insurance Company.

Other recent targets of similarly structured suits include familiar names ranging from BB&T Corporation, Aegon and TransamericaAmerican Century, and City National Corp, just to name a few of the examples covered recently by PLANSPONSOR and the wider financial media. In fact, New York Life’s 401(k) plan previously faced the same kind of litigation, which stretched on for nine years before resulting in a $14 million settlement with employees.  

In the newly filed complaint, employees suggest they have not been fairly treated by officials running the New York Life Agents Progress-Sharing Plan, known as the Agents Plan, and the New York Life Insurance Company Employee Progress-Sharing Plan, dubbed the Employee Plan. Rather than running the plans for the exclusive financial benefit of participants, plaintiffs accuse the firm of improperly favoring and thereby profiting from the plans’ use of the MainStay S&P 500 Index Fund.

The text of the compliant explains the MainStay line of mutual funds is owned and operated by defendant New York Life Insurance Company and its subsidiaries, and “each fund charges fees and expenses for the operation of MainStay Funds.” From 2010 to 2016, according to the compliant, plan fiduciaries utilized the MainStay index product, “thereby promoting New York Life’s financial interests by using the plans to promote MainStay mutual funds … even though far less expensive S&P 500 index alternatives were available.”

From 2010 to the present, plaintiffs claim, the MainStay S&P 500 Index Fund has had annual costs of 35 bps, or 0.35% per year, “more than 17 times higher than the Vanguard Institutional Index Fund, the S&P 500 index fund offered by Vanguard with annual expenses of only 2 bps, or 0.02% per year.”

While 35 bps is ostensibly pretty cheap for an investment fee compared with, say, an active retail mutual fund product, plaintiffs still suggest the plans could have easily invested in other brands of mutual funds ranging anywhere from 10 bps to 4 bps and below. “By retaining the MainStay S&P 500 Index Fund in furtherance of the financial interests of New York Life, the plans’ fiduciaries cost the plans’ participants millions of dollars in excess fees,” the complaint argues.

The complaint goes on to suggest a “prudent fiduciary managing the plans in a process that was not tainted by self-interest” would have removed the MainStay S&P 500 Index Fund from the plans. Plaintiffs further cite the fact that no other retirement plan with publicly available data apparently uses the MainStay S&P 500 Index Fund. “By retaining the MainStay S&P 500 Index Fund  and failing to investigate the availability of lower-cost alternatives in the marketplace, the plans’ fiduciaries have breached their twin duties of loyalty and prudence,” the complaint concludes.

The full text of the complaint is here

*Please note, the original title and hyper-link for this article incorrectly stated the MainStay index fund was used as a QDIA.