Use of Relatively New CITs Challenged in Second Lawsuit

The lawsuit also calls out the use of an investment manager’s proprietary actively managed funds and the plan sponsor’s failure to obtain cheaper share classes.

Former employees of Astellas US LLC have sued the pharmaceutical company, its board of directors and its retirement plan administrative committee, as well as the plan’s discretionary investment manager, Aon Hewitt Investment Consulting, for breaches of fiduciary duties and for prohibited transactions under the Employee Retirement Income Security Act (ERISA).

According to the complaint, instead of acting in the exclusive best interest of participants, Aon Hewitt, now known as Aon Investments USA, acted in its own interest by causing the plan to invest in Aon’s proprietary collective investment trusts (CITs) for Aon’s benefit. The Astellas defendants are also accused of failing to use the plan’s bargaining power to negotiate reasonable fees for investment management services.

Responding to a similar lawsuit filed in May, Aon told PLANSPONSOR, “As a matter of company policy, we don’t comment on litigation matters.” Astellas tells PLANSPONSOR, “We have just received the filing and are assessing the complaint. Astellas does not comment on pending litigation.”

From at least 2010 through August 25, 2016, Aon Hewitt (then known as Hewitt EnnisKnupp Inc.) was a fiduciary to the plan because it rendered investment advice for a fee. Effective August 26, 2016, Astellas and the administrative committee appointed Aon Hewitt as the plan’s discretionary investment manager.

According to the complaint, “Astellas and the administrative committee did not require that Aon Hewitt consider all prudent investment vehicles that were available to the plan prior to making any investment decision. In direct violation of their fundamental fiduciary obligations, Astellas and the administrative committee expressly agreed to allow Aon Hewitt to select for the plan exclusively from its proprietary Aon Hewitt collective investment trusts, and agreed that Aon Hewitt had no obligation to consider non-proprietary investment vehicles for the plan.”

Soon after Aon was appointed as discretionary investment manager, the lawsuit says, the defendants restructured the plan. The Astellas defendants “partnered with Aon Hewitt” to develop a new investment lineup for plan participants. With one exception, the defendants removed all the plan’s mutual funds and replaced them with six CITs, five of which were Aon’s proprietary CITs.

“Defendants failed to conduct an independent investigation into the merits of the Aon Hewitt collective investment trusts prior to placing them in the plan,” the complaint states. It says the funds had a limited performance history of less than three years when they were included in the plan. In addition, during that time, all the Aon Hewitt CITs underperformed the benchmarks selected by Aon Hewitt and their style-specific benchmarks. The lawsuit says the CITs also underperformed the comparable mutual funds they replaced on the plan’s investment menu.

Aon Hewitt is accused of earning substantial revenue from the investment advisory fees charged on the funds and of using the plan to increase its assets under management for the funds.

The lawsuit also takes issue with the use of actively managed Aon proprietary funds. It says these funds also did not have sufficient performance records when added to the plan and underperformed the benchmarks identified by Aon Hewitt, as well as charged higher fees. For example, the complaint says that by including the Aon Hewitt Large Cap Equity Fund in the plan, the defendants caused participants to lose more than $15.6 million of their retirement savings as measured by the difference in the investment returns between the Aon Hewitt fund and the Vanguard Growth Index Fund. The complaint adds that by not retaining the plan’s prior actively managed large cap growth option rather than using the Aon Hewitt Large Cap Equity Fund, participants lost in excess of $28.5 million of their retirement savings.

As another point, the lawsuit alleges the defendants violated their fiduciary duties by not using the plan’s size to obtain share classes with far lower costs than the share classes used in the plan. In addition, the lawsuit says when the investment lineup was restructured in 2016, the Astellas defendants represented to participants that it was “making available the lowest overall cost share class of each fund. By selecting and maintaining higher-cost share classes for certain plan investments thereafter, the Astellas defendants acted contrary to that express representation made to plan participants.”

The complaint states, “By providing plan participants the more expensive share classes of plan investment options, the Astellas defendants caused participants to lose millions of dollars of their retirement savings.”

In addition to requesting that the court order the defendants to restore all losses to the plan, the lawsuits request that they reform the plan to include only prudent investments.