Self-Dealing Suit Challenges Fees and Fund Monitoring

Fiduciaries of the internal JPMorgan Chase 401(k) plan are facing a proposed class-action suit, brought by an employee who argues the retirement plan’s fees were not properly controlled and that conflicts of interest damaged net-of-fee performance.

The suit, filed in United States District Court for the Southern District of New York, names as defendants JPMorgan Chase Bank, as well as the company’s board, various benefit committee members, human resources executives and others.

The complaint echoes allegations that are by now very familiar to retirement plan industry professionals: “Plan’s fiduciaries breached their duties of loyalty and prudence to the plan and its participants by failing to utilize an established systematic review of the investment options in its portfolio to evaluate them for both performance and cost, regardless of affiliation to JPMorgan Chase … This failure to adequately review the investment portfolio of the plan led thousands of plan participants to pay higher than necessary fees for both proprietary investment options and certain other options for years.”

In no uncertain terms the lawsuit alleges “blatant self-dealing” that occurred when fiduciaries “allowed higher than necessary fees to continue to be paid on their own proprietary options.” Again like a long list of other proposed class action suits filed in recent months and years, participants say the large size of the plan, valued between $14.64 billion and $20.94 billion during the class period, should have been enough to allow plan fiduciaries to negotiate fees down to levels near the lowest available in the market—regardless of whether a proprietary or outside provider was utilized.

The specific charges include a failure to adequately review the investment portfolio of the plan to ensure that each investment option was prudent, both in cost and performance and without regard to the option’s affiliation with JPMorgan Chase. Plaintiffs also want an accounting of why the plan continued to retain proprietary mutual funds, from the bank and its affiliated companies, within the plan “despite the availability of nearly identical lower cost and better performing investment options.”

Finally, participants accuse plan fiduciaries of “failing to affect a reduction in fees on 20 different investment options at an earlier date, most of them proprietary funds; and failing to offer commingled accounts, separate accounts, or collective trusts in lieu of the proprietary mutual funds in the plan, despite their far lower fees.”

NEXT: Details from the complaint 

The lead plaintiff in the challenge is a resident of Plainfield, Illinois. Plaintiff is a current participant of the plan; and while a participant she invested in the a proprietary JPMorgan target-date 2020 fund. According to the text of the complaint, through her investment in this target-date fund—which itself is made up of other mutual funds—plaintiff was also invested in BlackRock index funds offered within the plan.

Harkening to some of the discussion around timeliness of claims filed under ERISA coming out of the now-famous Tibble vs. Edison challenge argued before the U.S. Supreme Court, the plaintiff suggests she “did not have knowledge of all material facts (including, among other things, the cost of the investments in the plan relative to alternative investments that were available to the plan but not offered by the plan) necessary to understand that defendants breached their fiduciary duties and engaged in other unlawful conduct in violation of ERISA, until shortly before this suit was filed … Further, plaintiff did not have and does not have actual knowledge of the specifics of defendants’ decision-making processes with respect to the plan, including defendants’ processes for selecting, monitoring, and removing plan investments, because this information is solely within the possession of defendants prior to discovery.”

A significant portion of the challenge is spent enumerating by name a list of individual defendants across JP Morgan executive leadership and within the HR and benefits staff. Important to note, both named fiduciaries and de facto fiduciaries with discretionary authority with respect to the management of the plan and its assets are called out by name. There is also an exploration of the design of the plan, which includes some seemingly well-crafted and even somewhat generous features when compared with industry benchmarks on factors beyond the investment fees specifically being challenged.

As the text of the complaint lays out, “Eligible employees are automatically enrolled 31 days following their eligibility date at a rate of 3% of ongoing compensation, defined as the base salary or regular pay of the employee, unless they specifically opt out or elect to enroll earlier. Each year, the contribution rate will increase by 1% up to a total contribution rate of 5%. The default investment choice is the appropriate TDF based on the employee’s age and assumed retirement date of 65 … JPMorgan Chase provides matching contributions up to 5% of ongoing compensation, following the completion of one year of service for employees making less than $250,000 a year … Plan participants are vested in matching contributions following three years of total service.”

NEXT: The funds in question 

The text of the lawsuit dives into detail of the retirement plan’s investment menu, suggesting prudent plan fiduciaries would have moved to replace a number of proprietary investment options with alternatives from the wider market.

For example, discussing the available mid-cap growth fund, plaintiffs suggest the annual expense ratio was between 111 and 120 basis points, but with waivers, the charge to plan participants was closer to 93 basis points. “However, waivers in expenses are not guaranteed and can be revoked at any time, meaning that despite the past charges, at any time while participants were invested in this option, charges could be increased,” the plaintiff contends. “An investigation of actively managed alternatives within the marketplace would have revealed that numerous actively-managed mid-cap growth mutual funds from companies such as Vanguard, T. Rowe Price, and Prudential were available that would have offered comparable or superior investment management services with costs that were at least 30% lower than those charged by the [proprietary option]. Even less expensive collective trust and separate account options were available.”

Similar arguments are presented for the plan’s small cap option, a core bond fund option, as well as the plan’s target-date qualified default investment alternative (QDIA), leading the plaintiff to the conclusion that “pursuant to ERISA … defendants are liable to restore the losses to the plan caused by their breaches of fiduciary duties alleged.” Plaintiffs also seek the court to compel changes in plan administration processes to avoid future issues.

Concerning the lawsuit, JPMorgan shared the following statement with PLANSPONSOR: “We have received the complaint and are reviewing it. We disagree with the central allegations and look forward to defending the claim in court.”

The full text of the complaint is available here.