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Compliance June 26, 2020
Lawsuit Says Plan Fiduciaries Should Have Chosen Less Expensive CITs
Though the majority of investment options for Estee Lauder’s 401(k) are CITs, the lawsuit argues the TDFs are more expensive private label CITs.
Reported by Rebecca Moore
Former participants in the Estee Lauder Companies 401(k) Savings Plan have filed a proposed class action lawsuit alleging the company, its board of directors and the plan’s investment committee breached fiduciary duties under the Employee Retirement Income Security Act (ERISA) by failing to prevent the plan from paying lower investment and recordkeeping fees.
“As a large plan, the plan had substantial bargaining power regarding the fees and expenses that were charged against participants’ investments. Defendants, however, did not try to reduce the plan’s expenses or exercise appropriate judgment to scrutinize each investment option that was offered in the plan to ensure it was prudent,” the complaint states.
The plaintiffs allege that from June 22, 2014, through the date of judgment, the defendants, as fiduciaries of the plan, breached their duties by failing to objectively and adequately review the plan’s investment portfolio with due care to ensure that each investment option was prudent, in terms of cost, and by maintaining certain funds in the plan despite the availability of identical or materially similar investment options with lower costs and/or better performance histories.
They say these breaches cost the plan and its participants millions of dollars.
Estee Lauder has not yet responded to a request for comment.
As is common in ERISA cases now, the complaint states that the plaintiffs did not have knowledge of all material facts necessary to understand that the defendants breached their fiduciary duties and engaged in other unlawful conduct in violation of ERISA until shortly before the suit was filed.
The lawsuit says the plan has retained several actively managed funds as investment options “despite the fact that these funds charged grossly excessive fees compared with comparable or superior alternatives, and despite ample evidence available to a reasonable fiduciary that these funds had become imprudent due to their higher costs relative to the same or similar investments available.” The complaint states that this decreased participant compounding returns and reduced the available amount participants will have at retirement.
The lawsuit notes that the majority of funds in the plan stayed relatively unchanged during the class period. And, in 2018, it says, nearly half of the funds in the plan were significantly more expensive than comparable funds found in similarly sized plans. The complaint includes a chart that shows the expense ratios for funds in the plan were, in some cases, up to 57% greater than the median expense ratios in the same category.
Between 2014 and 2018, the plan maintained between $489 million and $1.06 billion in JPMorgan collective investment trusts (CITs). In 2018, more than a billion dollars of plan assets were invested in private label collective trust target-date funds (TDFs) offered by JPMorgan. The complaint explains that CITs are less expensive than mutual funds; however, it says that while the TDFs in the plan are CITs, they are private label CITs with much higher expense ratios than the typical CITs offered by JPMorgan. “A clear indication of defendants’ lack of a prudent investment evaluation process was their failure to identify and select available lower cost collective trusts,” the complaint states.
The plaintiffs argue that, given that the lower-cost CITs were comprised of the same underlying investments as their mutual fund counterparts, and managed by the same investment manager, they would have had greater returns than the plan’s funds. In addition, they note that the plan did not receive any additional services or benefits based on its use of more expensive funds.
The lawsuit also alleges that the defendants failed to prudently manage and control the plan’s recordkeeping costs by failing to track the recordkeeper’s expenses; identify all fees, including direct compensation and revenue sharing; and perform a request for proposals (RFP) process at regular intervals. It notes that Alight has been the plan’s recordkeeper since at least 2014, and “there is no evidence defendants have undertaken an RFP since 2014 in order to compare Alight’s costs with those of others in the marketplace.” The complaint says that “by any measure,” Alight’s direct compensation for recordkeeping services has been unreasonable.
