Self-Dealing Suit Questions Investment Lineup Prudence

Similar to other self-dealing suits recently filed against well-known retirement plan providers, Edward Jones is accused of favoring its own investments and those of its “preferred partners” in its 401(k) plan, at the expense of performance.

Defendants, which include the Edward Jones company and individual fiduciaries serving the plan, are also accused of causing the plan to pay excessive recordkeeping and plan administration fees to the recordkeeper, Mercer HR Services, Inc. According to paperwork filed by defendants on behalf of the plan, the plan’s payments to Mercer HR Services “increased by 314% between 2010 and 2014 even though market rates for recordkeeping services declined over that period and even though the number of plan participants only increased by 22%.”

Plaintiffs are seeking class action certification for their suit, which calls out a number of investment options by name for being persistently poor performers that were allowed to remain on the investment menu due to their brand’s connection with Edward Jones.

According to the complaint, the lead plaintiff’s individual account in the plan was “invested in various investment options offered under the plan’s investment menu in the class period, including: American Funds Europacific Growth Fund, American Funds Growth Fund of America, and Washington Mutual Investors Fund, with allocations set by defendants according to plaintiff’s investment election for a Balanced Toward Growth portfolio. The plaintiff, like substantially all plan participants and beneficiaries, was not provided any information regarding the substance of deliberations, if any, of defendants concerning the plan’s menu of investment options or selection of service providers during the class period.”

The text of the complaint shows the Edward Jones plan is a straightforward 401(k) and profit sharing arrangement  where participants “have the opportunity to direct the investment of the assets allocated to their individual accounts into the investment options approved by the committee and offered by the plan, and the return on those investments are credited to each participant’s account.” During the class period the plan “has invested in at least 53 different investment options, of which three were managed by defendants and at least 40 more were managed by partners or preferred partners of Edward Jones.”

NEXT: Specific allegations 

According to the complaint, the mutual fund companies Edward Jones markets pay Edward Jones a portion of all fees they receive from the assets Edward Jones steers into their funds.

“These payments are called revenue-sharing and they include both ‘annual asset fees’ and ‘sales fees,’” the complaint states. “They are calculated based on the total contributions and/or assets made by Edward Jones clients. Edward Jones also receives hundreds of millions of dollars per year in ‘networking’ and ‘shareholder accounting’ fees from partner mutual fund companies, like those included in the plan.”

During the class period, plaintiffs suggest the asset fees have ranged from 2.4 basis points (bps) to 13 bps. According to plaintiffs, “the annual asset fees are based on the value of assets under management no matter when they were invested. Sales fees are one-time payments based on the amount of new money contributed to the funds by the plan and other Edward Jones customers in the year in which the contribution was made.

The text of the complaint goes on to suggest “certain of the funds marketed by Edward Jones, and most of the funds in the plan, are managed by ‘Preferred Product Partners’ of Edward Jones. As consideration for the asset fees and sales fees ‘shared’ with Edward Jones by the Preferred Product Partners, Edward Jones provides them with greater access to certain information about its business practices, frequent interactions with Edward Jones financial advisers, marketing support and educational presentations.”

Plaintiffs suggest the cozy nature of this relationship eventually led plan officials to start to consider these monetary and compensation issues above the best-interest of plan participants.

“The plan’s investments show a high correlation to mutual funds offered by mutual fund families that pay Edward Jones the most money,” the complaint continues. “Of the 12 mutual fund families listed in the 2015 Edward Jones revenue sharing disclosure, eight have fund offerings in the plan. The eight mutual fund family partners (or preferred partners) represented in the plan accounted for 92% of the revenue sharing paid by mutual fund families to Edward Jones in 2015. Every single partner or preferred partner that paid Edward Jones more than $10,000,000 in revenue sharing in 2015 was represented in the plan. Indeed, approximately 80% of plan assets were invested in mutual funds offered by partners or preferred partners of Edward Jones. And approximately 80% of funds offered in the plan in 2014 came from partners or preferred partners.”

The full text of the complaint is available online here, including more specific information about the funds being scrutinized and the damages being sought.