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Compliance July 15, 2019
Adidas Sued Over Excessive Fees for 401(k) Participants
Plaintiffs in the lawsuit argue that passive funds would have resulted in better returns net of fees that the actively managed funds offered in the plan.
Reported by Rebecca Moore
Participants in the Adidas Group 401(k) Savings and Retirement Plan have filed a proposed class action lawsuit against Adidas America over the plan’s administrative and investment fees.
According to the complaint, for every year between 2013 and 2017, the administrative fees charged to plan participants were greater than a minimum of approximately 75% of its comparator fees when fees are calculated as cost per participant. And for every year between 2013 and 2017 but two, the administrative fees charged to plan participants were greater than 80% of its comparator fees when fees are calculated as a percent of total assets.
The complaint includes tabular depictions of the Adidas plan’s fees calculated as cost per 401(k) plan participant/beneficiary and as a percentage of the total plan’s assets when compared to a representative group of plans with a participant count from 5,000 to 9,999 and plans with a total value of plan assets greater than $500 million. It shows the total difference from 2013 to 2017 between Adidas’ fees and the average of its comparators based on total number of participants is $6,242,659. The total difference from 2013 to 2017 between Adidas’ fees and the average of its comparators based on plan asset size is $6,078,234.
The lawsuit contends that the plaintiffs had no knowledge of how the fees charged to and paid by Adidas plan participants compared to market norms.
The participants also allege the Adidas plan’s fees were also excessive when compared with other comparable mutual funds not offered by the plan. A chart in the complaint shows the 3-year return of investments offered by the Adidas plan compared to 3-year returns of comparable investments.
“By selecting and retaining the Plan’s excessive cost investments while failing to adequately investigate the use of superior lower-cost mutual funds from other fund companies that were readily available to the Plan or foregoing those alternatives without any prudent reason for doing so, Adidas caused Plan participants to lose millions of dollars of their retirement savings through excessive fees,” the lawsuit alleges.
The lawsuit suggests that prudent fiduciaries exercising control over administration of a plan and the selection and monitoring of designated investment alternatives will minimize plan expenses by hiring low-cost service providers and by curating a menu of low-cost investment options.
It argues that the funds chosen by Adidas from which plan participants may elect to invest are actively managed, which in significant measure results in the higher administrative fees. The plaintiffs suggest Adidas could have offered passively managed funds as an alternative to plan participants, which would have resulted in significantly lower administrative fees yet generated comparable returns.
They claim that it is understood in the investment community that passively managed investment options should either be used or, at a minimum, thoroughly analyzed and considered in efficient markets such as large capitalization U.S. stocks. The lawsuit contends this is because it is difficult and either unheard of, or extremely unlikely, to find actively managed mutual funds that outperform a passive index, net of fees, particularly on a consistent basis.
“To the extent fund managers show any sustainable ability to beat the market, the outperformance is nearly always dwarfed by mutual fund expenses. Accordingly, investment fees are of paramount importance to prudent investment selection, and a prudent investor will not select higher-cost actively managed funds unless there has been a documented process leading to the realistic conclusion that the fund is likely to be that extremely rare exception, if one even exists, that will outperform its benchmark over time, net of investment expenses,” the complaint states.
The participants allege Adidas’ decision-making, monitoring and soliciting bids from investment funds was deficient in that it resulted in almost no passively managed funds options for plan participants, resulting in inappropriately high administrative plan fees.