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Compliance December 17, 2021
Lawsuit Claims Voya Impermissibly Favored Its Own TDFs in DC Plan
Participants in Voya’s defined contribution retirement plan suggest certain funds were not selected and retained for the plan as the result of an impartial or otherwise prudent process.
Reported by John Manganaro
A new Employee Retirement Income Security Act (ERISA) lawsuit has been filed in the U.S. District Court for the District of Connecticut, suggesting Voya Financial engaged in self-dealing within a retirement plan offered to its own employees.
In addition to the Voya company, multiple investment and administrative committees are named as defendants in the lawsuit, alongside some 30 “John Doe” defendants.
The preamble of the complaint offers the following summary of the plaintiffs’ allegations, which closely resembles other lawsuits that have been filed in recent years against major U.S. financial services companies, with mixed results: “This case is about a company’s self-dealing at the expense of its own workers’ retirement savings. The defendants were required by the Employee Retirement Income Security Act of 1974 [ERISA] to act solely in the interest of the plan’s participants when making decisions with respect to selecting, removing, replacing and monitoring the plan’s investments. Rather than fulfilling these fiduciary duties, among the highest duties known to the law, by offering the plaintiffs and the other investors in the plan only prudent investment options at reasonable cost, the defendants selected for the plan and repeatedly failed to remove or replace a number of deficient proprietary retirement investment funds (Voya Funds) managed and offered by Defendant Voya Financial Inc. and/or its subsidiaries or affiliates.”
The complaint alleges these funds were not selected and retained for the plan as the result of an impartial or otherwise prudent process, but were instead selected and retained by the defendants because they benefited financially from including these options in the plan.
“By choosing and then retaining the Voya Funds as a core part of the plan’s investments to the exclusion of alternative investments available in the 401(k) plan marketplace, the defendants enriched themselves at the expense of their own employees,” the complaint alleges. “The defendants also breached their fiduciary duties by failing to consider the prudence of retaining certain other deficient investments that were inappropriate for the plan during the relevant period, and by failing to monitor the plan’s administrative fees. The defendants committed further statutory violations by engaging in conflicted transactions expressly prohibited by ERISA.”
Other self-dealing cases have been met with varied results, depending on the specific facts and circumstances and the viewpoints of the district courts and appellate judges. While some financial services firms have successfully defeated similarly structured lawsuits—for example, Morgan Stanley back in October 2019—others have either seen their summary dismissal claims rejected, or they have reached settlements.
Indeed, earlier this year, a federal district court judge moved forward a lawsuit alleging that Wells Fargo 401(k) plan fiduciaries should have been able to obtain superior investment products at a very low cost but instead chose proprietary products, for their own benefit, increasing fee revenue for the company and providing seed money to newly created Wells Fargo funds. Prior to that, a judge dismissed dueling dismissal motions in a self-dealing lawsuit targeting BlackRock. While not an outright defeat for the firm, the ruling stated there were genuine disputes of material facts that made summary judgment, whether in favor of the plaintiffs or the defense, inappropriate. That development opened up the door for a lengthy and potentially expensive discovery process, which in turn led BlackRock to settle the suit to the tune of nearly $10 million, though, like the other aforementioned providers, it admitted no wrongdoing.
In the Voya case, the plaintiffs put their focus on alleging that Voya fiduciaries engaged in an imprudent process when selecting and retaining investments, in addition to simply stating that the plan’s investments underperformed or were more expensive than other available investment options.
“While an ERISA fiduciary’s use of proprietary investment options in its employee 401(k) plan is not a breach of the duty of prudence or loyalty in and of itself, a plan fiduciary’s process for selecting and monitoring proprietary investments is subject to the same duties of loyalty and prudence that apply to the selection and monitoring of other investments,” the complaint states. “Here, the plan has an investment lineup featuring a number of underperforming investments, including a large suite of target-date funds [TDFs] managed by Voya. … The relevant investment performance and fee data pertaining to the funds challenged herein, including the Voya Funds, support a strong inference that the defendants failed to follow a prudent process in selecting and then monitoring the menu of investment options for plaintiffs and other participants who invested in the plan.”
Further along in the lawsuit, similar allegations focus on the offering of a Voya-operated stable value investment option.
“Voya does not disclose the exact amount of the spread earnings that it has made here off the backs of plaintiffs or the return on the underlying general account assets that back the Voya Stable Value Option,” the complaint alleges. “However, publicly available information indicates that not only has the spread involved here existed continuously during the relevant period, but that the amount of the spread has also been considerable—meaning that Voya has kept significantly more of the investment returns yielded by the Voya Stable Value Option than Voya has paid to plan participants invested in this fund.”
Voya says, as a matter of corporate policy, it does not comment on specific allegations in pending legal matters. “Voya believes in its plan and its process, and intends to defend the case vigorously,” a company spokesperson said in a statement.
The full text of the new Voya lawsuit is available here.
