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Compliance December 17, 2012
Case About Ameriprise 401(k) Fund Selection Moves Forward
December 17, 2012 (PLANSPONSOR.com) – A case claiming Ameriprise Financial favored its own affiliate funds in its 401(k) investment lineup has moved forward.
Reported by Rebecca Moore
In denying Ameriprise’s motion to dismiss, Judge Susan Richard Nelson of the U.S. District Court for the District of Minnesota found the plaintiffs plausibly alleged Ameriprise selected affiliated funds, such as RiverSource mutual funds and nonmutual funds managed by Ameriprise Trust Company (ATC), to benefit themselves at the expense of participants.The plaintiffs pointed to prudent alternatives to Ameriprise-affiliated funds that the plan’s fiduciaries could have chosen as investment options.
Nelson noted that although, Department of Labor (DOL) regulations permit Ameriprise to select affiliated investment options for the plan, it still has a fiduciary duty to act with an “eye single” towards the participants in the plan.
According to Nelson’s opinion, as in the Braden v. Wal-Mart case, the “gravamen” of the Ameriprise participants complaint is that the defendants “failed adequately to evaluate the investment options included in the Plan” and, as a result, chose affiliated investment options that charged excessive fees (see “8th Circuit Says Wal-Mart 401(k) Suit Requires Further Discussion”). The court in Braden clarified that Rule 8 does not require a plaintiff to plead “specific facts”, explaining precisely how the defendant’s conduct was unlawful, but rather may plead facts indirectly showing unlawful behavior to “give the defendant fair notice of what the claim is and the grounds upon which it rests.”Nelson rejected Ameriprise's argument that it did not violate its fiduciary duties under the Employee Retirement Income Security Act (ERISA) by including the affiliated funds because the plan’s investment lineup includes a range of investment options from which participants can choose, including nonaffiliated funds. Nelson pointed out that the 4th, 6th and 7th Circuits have found that merely including a sufficient mix of prudent investments along with imprudent options does not satisfy a fiduciary’s obligations under ERISA.
In their lawsuit, the Ameriprise participants claim that, despite many investment options available in the market, the plan invested in mutual funds managed by Ameriprise affiliates because they were “managed by, paid fees to and generated profits for Ameriprise.”They claim that the affiliated funds provided “millions of dollars in fees” for RiverSource and ATC, all of which resulted in a financial benefit for Ameriprise.
Specifically, the participants allege that Ameriprise hired ATC to be the plan trustee and recordkeeper without any competitive bidding process even though “other entities could have provided the same services at a lower cost to the Plan.”Additionally, they allege Ameriprise chose to invest in RiverSource mutual funds despite the fact that the fees charged for these funds were significantly higher than the median fees for comparable mutual funds in 401(k) plans such as funds offered by Vanguard. Moreover, Ameriprise chose to invest participants’ assets in the R4 share class of the RiverSource mutual fund, even though they could have invested their money in the R5 share class, which charged lower fees than R4 share class “for identical investment management.”
Finally, the participants contend that Ameriprise used the retirement assets of its employees to seed new and untested affiliated mutual funds in order to make those funds more marketable to outside investors (see “Ameriprise Facing Revenue-Sharing Lawsuit”).
Nelson’s opinion is here.