Lawsuit Says Money Market Fund Was Like ‘Stuffing Cash Into a Mattress’

BBVA Compass Bancshares is accused of failing to monitor investments and remove imprudent ones.

Participants in the Compass SmartInvestor 401(k) Plan have filed a lawsuit as representatives of a class of participants and beneficiaries of the plan against defendants BBVA Compass Bancshares, Inc., Compass Bancshares, Inc., and BBVA USA Bancshares, Inc., all d/b/a BBVA for breaches of fiduciary duties under the Employee Retirement Income Security Act (ERISA).

The complaint accuses BBVA of mismanaging a $100 million money market fund “that was the investment equivalent of stuffing cash into a mattress” and failing to properly monitor investments and remove imprudent ones, “including high-cost mutual funds whose performance did not justify their increased costs.”

According to the complaint, fiduciaries of large plans are held to the standard of financial experts in the field of investment management. It contends that large plans such as the BBVA plan, responsible for $931 million in retirement savings of over 13,000 employees, have ready access to high-quality administrative and investment management services from reputable providers at a reasonable cost.

It cites the Restatement of Trusts, saying BBVA has a duty both of impartiality and to “produce income that is reasonably appropriate to the purposes of the trust and to the diverse present and future interests of its beneficiaries.” In other words, BBVA has an affirmative obligation to generate income from trust assets. “The Plan may not hoard cash in the name of capital preservation,” the complaint says. In addition, the plaintiffs claim “the performance of an ERISA plan’s investment options must be evaluated net of costs.”

The complaint also cites the Supreme Court decision in Tibble v. Edison: “Under trust law, a trustee has a continuing duty to monitor trust investments and remove imprudent ones . . . separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset.”

According to the compliant, under circumstances prevailing during the class period—which it notes was a period during which ultra-short-term rates were at historic lows—the use of a money market fund as an income producing option was imprudent because the return on money market funds was near zero, and at some points the return net of costs was negative. The plaintiffs argue that BBVA failed to have a process, or failed to adhere to such process, to monitor the plan’s investment menu and failed to recognize its duty to offer sufficient income producing bond options during a period of time when money market returns were near zero.

“Persons saving for retirement must achieve investment returns substantially greater than zero to enjoy even a modest retirement. For them, the Vanguard Money Market Fund was suitable for short-term cash management, but was of no use for long-term retirement investment. For the six years preceding the filing of this lawsuit, the Plan’s money market funds returned 0.01% or less per year, close to nothing. Indeed, accounting for inflation, participants invested in these options actually lost money,” the complaint says.

The plaintiffs contend the amount participants lost can be determined by comparing the amounts that participants earned from the money market fund to the amount participants would have earned had they been given the choice of investing in a prudent fixed-income investment such as an income-producing bond or stable value funds. Using a comparison between the money market fund and a bond fund benchmark, such as an aggregate bond index, the lawsuit shows an estimate that the total loss suffered by participants, before compounding, is approximately $7.79 million.

Low-performing, high-cost mutual funds

The lawsuit claims the expense ratio of a mutual fund is often the best indicator of how well a mutual fund will perform. “Expenses are not just an important factor in mutual fund selection. They are the most important factor—that is, the best indication whether a fund is a good or a bad fund in most cases is its expense ratio,” it says. The complaint cites Russell Kinnel, the director of fund research at Morningstar, who said: “If there’s anything in the whole world of mutual funds that you can take to the bank, it’s that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds. . . . Investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor of performance.”

The compliant states that an ERISA fiduciary must have a prudent process to identify underperforming, high-fee funds and to remove them from the retirement plan in a timely fashion. “Most are better off investing in safe, low-cost index funds than investing in high-cost actively managed funds chasing excess returns. BBVA chose instead to play the much riskier game of maintaining an investment menu that used only high-fee actively managed funds for most asset classes of investments,” it says.

BBVA is also accused of failing to offer participants low-cost index fund alternatives for the high-fee funds that underperformed and failed to cover their fees and costs. The lawsuit also says the high-fee funds BBVA maintained consistently underperformed both their benchmarks and low-cost index fund alternatives during the class period.

“During the Class Period, BBVA maintained an investment platform that contained 14 different mutual funds, none of which was a low-cost index fund. On average, BBVA’s investment menu was more than four times the cost of a menu of comparable low-cost index funds from a reputable provider,” the lawsuit states. The complaint listed specific underperforming funds BBVA selected but then failed to adequately monitor.

The plaintiffs say the loss cannot be calculated with certainty based upon the information available to them at this time. However, from the information that is available, the lawsuit claims that a reasonable estimate is that after six years, the lost appreciation was about 25%. “BBVA wasted over $40 million of Plan participants’ retirement money chasing excess returns,” it says.