401(k) Fee Lawsuits Highlight Fiduciary Gaps

October 6, 2021

Retirement Committee Duties401(k) fee lawsuits over investment fees continue to proliferate.  Planadviser has reported that Northern Trust Corporation and Northern Trust Inc., as investment fiduciaries, have been added as defendants to a lawsuit.  The lawsuit alleges AutoZone 401(k) plan fiduciaries violated their duties as set forth in the Employee Retirement Income Security Act (ERISA).  Specifically, the lawsuit accused AutoZone 401(k) fiduciaries of allowing Prudential to allocate excessive assets to its proprietary products inside its GoalMaker asset allocation solution.

Excessive fees are at the center of the 401(k) fee lawsuit.  An amended complaint alleged that Northern Trust and other defendants failed to monitor the fees and performance of the plan’s investments.  It also accused the defendants of paying excessive fees to Prudential and other plan service providers.

According to the 401(k) lawsuit, as quoted in Planadviser:

“Specifically, the defendants failed to monitor and to replace an obscenely overpriced Prudential stable value fund, the primary investment option to which GoalMaker allocated employee’s retirement savings; the defendants failed to monitor and replace high-cost GoalMaker funds when there was no reason to believe that their performance would justify their additional costs; and the defendants failed to monitor the plan’s fees and expenses, including excessive stable value fund spread fees, investment management fees, sub-account charges, transaction costs, distribution fees and administrative expenses.  As a result, the plan kicked back payments to Prudential from the retirement savings of AutoZone’s employees in excessive amounts.”

AutoZone fiduciaries were concerned about the GoalMaker funds’ fees and performance, the amended complaint suggested, but received “bad advice from Northern Trust”, according to the Planadviser article.  According to the suit documents, Northern Trust had a vested interest in promoting the high-fee, actively managed funds used in the GoalMaker product because “it received approximately $1 million in fees a year from the active management of the assets of [AutoZone’s] pension plan.”  This created a conflict of interest for advising AutoZone’s investment committee on the use of actively managed funds inside the 401(k) plan.

AutoZone has since taken action to rectify the situation, according to the 401(k) fee lawsuit, which said that the company terminated its relationship with Northern Trust and hired a new investment advisor.  In addition, AutoZone’s investment committee replaced GoalMaker with target date funds (TDFs), and switched the high-fee, actively managed GoalMaker funds to a lineup of low-cost passive funds.

Northern Trust did not comment to Planadviser on the fiduciary lawsuit.  However, this and similar suits should be a cautionary tale for retirement plan sponsors and committees.  Fiduciaries should carefully evaluate the funds being offered to participants, as well as the related fees.  It is also a critical reminder that plan sponsors and retirement plan committees have a fiduciary responsibility to carefully vet and monitor service providers and investment advisors.  Fiduciaries should also monitor conflicts of interest, and other behaviors that don’t seem to be in line with participants’ best interests.  Annual benchmarking can help retirement plan sponsors and committees to keep tabs on their plan’s investments, fees, and services.

Steff Chalk

Steff Chalk

Steff C. Chalk is Executive Director of The Retirement Advisor University, a collaboration with UCLA Anderson School of Management Executive Education. Steff also serves as Executive Director of The Plan Sponsor University and is current faculty of The Retirement Adviser University.

Steff Chalk

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