Mutual Fund Provider Targeted in ERISA Complaint for Self-Dealing

Fiduciaries of defined contribution retirement plans offered by M&T Bank Corporation are accused in a new lawsuit of an increasingly common charge being leveled against providers in the 401(k) plan marketplace.

Targets of the suit, filed in the U.S. District Court for the Western District of New York, include a handful of retirement plan fiduciaries and multiple companies that work to provide proprietary M&T mutual funds. According to the plaintiffs, these defendants have “breached their fiduciary duties and engaged in unlawful self-dealing with respect to the plan in violation of ERISA, to the detriment of the plan and its participants and beneficiaries.”

Tellingly, the text of the complaint opens with a fairly extensive amount of general contextual information spelling out recent 401(k) plan lawsuits and the general atmosphere of skepticism around investment fee practices—citing, for example, the U.S. Supreme Court’s 2015 decision in Tibble vs. Edison. Writing about the Tibble decision even before introducing the specifics of their current complaint, the plaintiffs suggest basic assumptions about the fairness of investment fees and other common business practices dealing with retirement plans have been tossed out the widow as greater transparency comes to the fore.

“It has been shown that the potential for disloyalty and imprudence is much greater in defined contribution plans than in defined benefit plans,” the complaint alleges. “In a defined benefit plan, the participant is entitled to a fixed monthly pension payment, while the employer is responsible for making sure the plan is sufficiently capitalized, and thus the employer bears all risks related to excessive fees and investment underperformance … Therefore, in a defined benefit plan, the employer and the plan’s fiduciaries have every incentive to keep costs low and to remove imprudent investments.”

But in a defined contribution plan, participants’ benefits are limited to the value of their own investment accounts, which is determined by the market performance of employee and employer contributions, less expenses, the complaint says. “Thus, the employer has no incentive to keep costs low or to closely monitor the plan to ensure every investment remains prudent, because all risks related to high fees and poorly-performing investments are borne by the employee,” plaintiffs argue.

Turning to the circumstances of the current complaint being filed against M&T Bank fiduciaries, plaintiffs say that the defendants “do not act in the best interest of the plan and its participants. Instead, they use the plan as an opportunity to promote the business interests of M&T and its affiliates and subsidiaries at the expense of the plan and its participants.”

NEXT:  Accusations of self-dealing 

The accusations of self-dealing are tied primarily to the plan fiduciaries’ decision to offer and promote M&T Bank  proprietary funds on the defined contribution (DC) plan menu, which according to plaintiffs, were “known for extraordinarily high fees and chronic underperformance.”

According to the text of the complaint, since at least late 2010, eight of the plan’s 23 designated investment alternatives were M&T Bank proprietary mutual funds. “These funds were in the plan despite their obvious imprudence,” plaintiffs allege. “Their expenses were on average approximately 90% higher than similar funds found in similarly sized defined contribution plans, and all but one of the M&T-affiliated funds had underperformed its benchmark index both over the past year and over the past ten years.”

The implication of these facts is obvious, plaintiffs suggest: M&T Bank included the products not to improve retirement plan performance but instead to improve the performance of the investment options themselves, ultimately enriching the company at the expense of plan participants. 

“The fiduciary defendants not only failed to remove these imprudent funds as their fiduciary duties required, they went in the opposite direction by greatly expanding the lineup of proprietary mutual funds in the plan,” the plaintiffs further allege. “In approximately May 2011, M&T finalized its purchase of the distressed Wilmington Trust, which had its own family of over-priced mutual funds. Almost immediately after taking over Wilmington Bank, the fiduciary defendants added six out of Wilmington’s nine mutual fund offerings to the plan, despite their high expenses, and poor or non-existent performance history.”

Plaintiffs allege the fiduciaries should have, on multiple occasions, realized the funds were not performing well, and to respond accordingly. Instead, “over the next five years, despite the ongoing poor performance and high expenses of the Wilmington Funds, the fiduciary defendants kept these imprudent proprietary investments in the plan, reluctantly removing a few only because the funds themselves ceased their operations.”

The extensive complaint goes on to accuse M&T Bank fiduciaries of a variety of other now-familiar ERISA breaches. “For example,” plaintiffs write, “much of the plan’s assets are held in T. Rowe Price mutual funds. T. Rowe Price offers identical versions of these same funds as collective trusts or separate accounts that are much less expensive. Collective trusts and separate accounts are similar to mutual funds but are only offered to large institutional investors like 401(k) plans. Because such investment vehicles do not deal with retail investors (and because they are not subject to a number of regulations governing mutual funds), they significantly reduce costs for large, institutional investors. The fiduciary defendants have no excuse for failing to use such collective trusts or separate accounts. But the fiduciary defendants do have an impermissible purpose: the higher-cost T. Rowe Price mutual funds offered greater revenue-sharing payments than the less expensive vehicles.”

PLANSPONSOR has not yet received a response from M&T Bank regarding this lawsuit. The text of the complaint is here.