Self-Dealing ERISA Challenge Targets John Hancock

Participants in John Hancock Life Insurance Company’s defined contribution (DC) plan have filed a new Employee Retirement Income Security Act (ERISA) fiduciary breach lawsuit against their employer in the U.S. District Court for the District of Massachusetts.

The proposed class action suggests that John Hancock breached its fiduciary duties “by applying an imprudent and inappropriate preference for John Hancock products within the plan, despite their poor performance, high costs and lack of traction among fiduciaries of similarly-sized plans.”

In addition, the self-dealing lawsuit suggests the firm failed to monitor or control the plan’s administrative expenses, allegedly costing the plan millions of dollars in excessive administrative fees over the course of the class period.

Similar to other ERISA fiduciary breach lawsuits filed against other retirement plan service providers and investment managers, the complaint begins with generalized argumentation to the effect that financial service companies like John Hancock face a high potential for imprudent and disloyal conduct while operating their own retirement plans. The plaintiff suggests that the plan’s fiduciaries are in a position to benefit the company through the plan by, for example, using proprietary investment products that a non-conflicted and objective fiduciary would not choose.

“Defendant has not acted in the best interest of the plan and its participants,” the complaint states. “Instead, defendant used the plan—one of the largest 401(k) plans in the country—to promote John Hancock’s proprietary financial products and earn profits for John Hancock. Throughout the class period, defendant has offered only John Hancock investment products within the plan. Defendant failed to objectively evaluate the plan’s options in an unbiased manner or consider whether participants would be better served by other investment alternatives in the marketplace.”

The plaintiff suggests this has resulted in “tens of millions of dollars in lost investment returns” for the plan and its participants “since the start of the class period in 2014.” At the same time, the plaintiff alleges, John Hancock “failed to prudently and loyally monitor the plan’s administrative expenses, and instead allowed the plan to pay over three-times what a prudent and loyal fiduciary would have paid for such services.” The plaintiff says these excessive administrative payments, allegedly made in the form of revenue sharing payments coming directly from the investment fees charged to the plan for investing in John Hancock mutual funds, resulted in millions of dollars in additional losses to the plan and its participants during the class period.

This is far from the first self-dealing lawsuit to be filed in recent years against an investment manager or retirement plan recordkeeper under ERISA. Results have so far been mixed in such cases. Back in October 2019, a federal district court judge granted Morgan Stanley’s motion to dismiss an ERISA self-dealing lawsuit accusing it of various fiduciary breaches. Participants in Morgan Stanley’s 401(k) plan filed the lawsuit in 2016 on behalf of approximately 60,000 current and former plan participants, alleging the plan included investment options with excessive fees and used Morgan Stanley proprietary funds rather than other funds that would have been better and cheaper for participants. On the other hand, a different district court early last year issued a mixed ruling in a self-dealing lawsuit filed against Charles Schwab—permitting some claims to proceed while denying others.

In this new case, the plaintiff says the plan’s use of John Hancock target-risk funds “offers a good example of defendant’s imprudent and self-interested process for managing the plan’s investments.”

“The plan’s menu included all five of John Hancock’s target-risk funds (Multimanager Lifestyle Balanced, Conservative, Moderate, Growth and Aggressive) throughout the class period, and for most of that period, the John Hancock Multimanager Lifestyle Balanced Fund was the default fund for participants who did not elect an investment,” the lawsuit states. “As of year-end 2018, the plan had more than $105 million invested in the John Hancock Multimanager Lifestyle Balanced Fund, and had over $295 million invested in the target-risk funds in total.  Based on a review of publicly-filed Form 5500s from the 2017 and 2018 plan years for plans with over $500 million in assets, plaintiff is not aware of any defined contribution plan other than the plan that offered John Hancock’s target-risk funds (Multimanager Lifestyle Balanced, Conservative, Moderate, Growth or Aggressive) during that time period. The fiduciaries of other large defined contributions did not utilize these John Hancock target-risk funds for good reason. As of the end of 2019, all five target-risk funds materially trailed their custom benchmarks.”

According to the plaintiff, superior alternatives existed for each of the target-risk funds in the plan, and the fact that John Hancock used its own target-risk funds in spite of these superior alternatives “supports an inference that its process for selecting and monitoring the plan’s investments was self-interested and imprudent.”

The complaint goes on to allege that, in addition to the failures with respect to the plans’ investment program, the firm failed to properly monitor and control the plan’s recordkeeping expenses.

John Hancock declined to comment about the lawsuit. The full text of the complaint is available here.