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Compliance September 28, 2017
General Electric Charged With Self-Dealing in 401(k)
401(k) participants claim GE retained underperforming proprietary funds in the plan so that its asset management arm could earn significant profits.
Reported by Rebecca Moore
Participants in General Electric’s 401(k) plan have filed a proposed class action Employee Retirement Income Security Act (ERISA) lawsuit accusing the firm and plan fiduciaries of self-dealing.
According to the complaint, the harm to participants arises from five of the plan’s funds: GE Institutional International Equity Fund, GE Institutional Strategic Investment Fund, GE RSP U.S. Equity Fund, GE RSP U.S. Income Fund and GE Institutional Small Cap Equity Fund. The complaint notes that the plan has nearly one-quarter of a million participants and more than $28 billion in assets, making it one of the largest 401(k) plans in the country.
The plaintiffs claim GE representatives encouraged the plan’s participants at company meetings to invest their 401(k) account assets in GE’s proprietary mutual funds, which GE Asset Management (GEAM) managed until July 1, 2016. “GE was aware that despite the performance of the proprietary mutual funds it selected for the plan, GE would stand to earn significant revenues and profits in investment management fees that GEAM would charge the plan’s participants,” the complaint says. “GE prioritized profit over its fiduciary duty and saddled the plan’s participants with substandard proprietary mutual funds.”
As of December 31, 2015, 68% of the plan’s assets comprised GE-related investment options and approximately 56% of the pooled investment fund options available in the plan consisted of five of GE’s proprietary mutual funds. The lawsuit says GE’s selection of its proprietary mutual funds for the plan provided GEAM a constant source of fees and helped inflate the market value of GEAM, which GE sold to State Street for a reported $485 million on July 1, 2016.
The plaintiffs allege that GE selected and retained its poor-performing proprietary mutual funds for the plan when superior investment options were readily available. In addition, to the detriment of the plan’s participants, GE through GEAM profited from an arrangement where investment sub-advisers managed the plan for a rate less than the amount GEAM earned from the plan’s participants in investment management fees. During the class period, according to the lawsuit, GE earned hundreds of millions of dollars from GEAM and its management of the plan, while the plan’s participants suffered losses in the hundreds of millions of dollars.
About the FundsThe complaint says the International Fund suffered from chronic underperformance relative to its benchmark and other readily available alternatives dating back to January 2008. In the nine-year period between 2008 and 2016, the International Fund’s annual returns fell short of the benchmark every year but 2012 and 2015. During that same period, the International Fund underperformed relative to most of the comparable international equity mutual funds Morningstar identified. In 2010, the International Fund performed worse than 90% of the hundreds of international equity mutual funds available on the market. The International Fund also performed worse than 78%, 87%, and 73% of international equity mutual funds in 2011, 2014 and 2016, respectively. Morningstar’s total number of identified comparators ranged between 339 and 592 mutual funds.
In the nine-year period between 2008 and 2016, the Strategic Fund’s annual returns were below most of the moderate-risk, target mutual funds Morningstar identified, according to the lawsuit. In 2010, the Strategic Fund performed worse than 85% of the hundreds of moderate risk target mutual funds available on the market. The Strategic Fund also performed worse than 81%, 53%, 69%, and 78% of moderate risk target mutual funds in 2011, 2013, 2014, and 2016, respectively. Morningstar’s total number of identified comparators ranged between 431 and 727 mutual funds.
The RSP Equity Fund suffered from chronic underperformance relative to its benchmark and other readily available alternatives dating back to January 2009, according to the complaint. In the eight-year period between 2009 and 2016, the RSP Equity Fund’s annual returns were below the benchmark in every year but 2009, 2012, and 2013. The underperformance was significant in 2010, 2011, and 2015, when the RSP Equity Fund underperformed relative to most of the comparable large cap mutual funds Morningstar identified. In 2010, the RSP Equity Fund performed worse than 87% of the hundreds of large cap mutual funds available on the market. In 2011, 2015, and 2016, the RSP Equity Fund ranked in the bottom half of large cap mutual funds. Morningstar’s total number of identified comparators exceeded 1,000 mutual funds.
The lawsuit says from 2008 through 2010, the RSP Income Fund underperformed its benchmark (i.e., the Bloomberg Barclays U.S. Aggregate Bond Index) by 3.65%. During the same three-year period, the RSP Income Fund also significantly underperformed relative to the comparable mutual funds of investment leaders (e.g., Vanguard, PIMCO, and BlackRock) in the fixed income asset class. The RSP Income Fund’s underperformance relative to comparable fixed income mutual funds continued until July 2016 when GE sold GEAM to State Street.
“Any reasonable, disinterested investor monitoring their investments would have viewed these funds as imprudent investments,” the complaint states. The participants allege that the International Fund, the Strategic Fund, RSP Equity Fund, and RSP Income Fund experienced net redemptions as potential new investors sought to avoid these funds and GE’s investment advisory services.
According to the lawsuit, the Small Cap Fund was the only GE proprietary fund that consistently outperformed its benchmark. However, in contrast to its practice with the GE Funds, GEAM did not actively manage the Small Cap Fund’s assets, but hired and negotiated a fee with multiple investment sub-advisers to manage the fund. The participants allege that GEAM collected an investment management fee from the Small Cap Fund’s performance and retained for itself the difference between the management fee it collected from the fund and the fee it agreed to pay its investment sub-advisers. “From this arrangement, GEAM—and thereby GE—collected millions of dollars in unreasonable and/or excessive fees for services that GE was ultimately responsible for performing as the plan’s administrator,” the complaint says.
The participants seek to remedy the defendants’ harm and unlawful conduct, prevent further mismanagement of the plan and obtain equitable and other relief as provided by ERISA.