Compliance September 16, 2022

Suit Claims Janus Henderson Favored Its Own Funds in 401(k) Plan

Case alleges firm put high-fee, underperforming proprietary funds in its retirement plan

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Asset manager Janus Henderson is being sued by one of its retirement plan participants, who alleges that the company breached its fiduciary duty by loading its 401(k) plan with poorly performing proprietary funds burdened by high fees.

According to a complaint filed in the U.S. District Court for the District of Colorado by Sandra Schissler, a participant in Janus Henderson’s retirement plan since 2012, the plan’s fiduciaries violated the Employee Retirement Income Security Act by not acting prudently or in the interest of plan participants and beneficiaries. During the class period, which is from 2016 through the end of 2021, the 401(k) plan had between 1,700 and 1,900 participants and approximately $246 million to $512 million in assets.

“For investment management companies (like Janus Henderson), the potential for disloyal and imprudent conduct is especially high because the plan’s fiduciaries can benefit the company by stocking the plan’s investment menu with proprietary funds that a non-conflicted and objective fiduciary would not choose,” says the complaint.

The lawsuit alleges that rather than acting in the plan participants’ best interest, Janus Henderson used the plan to promote its proprietary investments to earn profits for the firm. According to the complaint, as of the end of 2021 the plan’s menu consisted of 50 investments, 40 of which were Janus Henderson Funds. It also alleges that the Janus Henderson Funds charged higher fees relative to nonproprietary alternatives selected by similarly sized plans. The lawsuit claims that annual investment fees paid by plan participants were at least 0.45% to 0.50% of total plan assets, which it says is “consistently higher” than the figure for the average 401(k) plan of similar size.

“An objective and prudent review of comparable investments in the marketplace would have revealed numerous available investments that were less costly and superior to the Janus Henderson Funds,” says the complaint. “While defendants’ disloyal and imprudent conduct generated significant profits for Janus Henderson, it has cost participants millions of dollars in excessive fees and lost investment returns.”

The lawsuit acknowledges that merely including proprietary funds in a plan’s investment menu is not a breach of fiduciary duty. However, it says that “based on defendants’ retention of proprietary funds over less expensive, superior nonproprietary funds, it is reasonable to infer that defendants’ process for selecting and monitoring the Janus Henderson funds was disloyal and imprudent.”

Data and Research September 15, 2022

New Study Examines Motivations for Plan Engagement

Recent research challenges old findings that fear is a better motivator than encouragement when it comes to plan engagement.

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The Defined Contribution Institutional Investment Association’s Retirement Research Center has published an update to previous research on the relative effectiveness of fear-based and encouraging messaging in motivating defined contribution plan participants to engage more in their plan.

In July 2021, DCIIA published research that tested the relative effectiveness of fear-based (sometimes referred to as cautionary) messaging versus encouraging messaging in getting plan participants to act on behalf of their own retirement. The 2021 study argued that motivating recipients to engage is an important measure of the success of the plan, and demonstrated that while encouraging and cautionary messaging both work, cautionary messaging is more effective.

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Respondents were asked seven questions to gauge their baseline engagement in their plan. Then they were shown either a cautionary message that warned that they were short of their retirement goal or an encouraging message that congratulated them for being within range, though still short, of their goal.

The cautionary message triggered consistently higher engagement when the seven questions were asked again than the encouraging one. However, the researchers argued that too much fear can be counterproductive since it can make a recipient’s retirement goal seem impossible to reach, which could discourage engagement.

A follow-up DCIIA study released this week looked at 1,500 people in the Indiana Public Retirement System. Some were sent an email with an encouraging message, and the rest received an email with a cautionary one. They then counted the number of email recipients who opened the email at once, and then the number that logged in to their account.

The study found that 39% of those who received an encouraging message opened their email, versus 34% of those who received a cautionary email. Of those who were encouraged, 21% went on to log in to their account, whereas 12% of those cautioned did so.

The study did not track what those respondents did after logging in, nor ask them what precisely motivated them to do so, so it is not clear to what degree they actually “engaged,” or what form that engagement took. This is unlike the previous study, which examined seven specific forms of engagement, such as whether they would be more likely to speak with a financial professional.

The study says DCIIA’s past work in an experimental or “theoretical” setting showed that cautionary messaging was more motivating for plan engagement, whereas encouraging messaging was more motivating in a “real-world” setting.

One possible criticism of this interpretation is that the second study considered relatively superficial actions such as clicking on an email and then logging into an account as plan engagement, whereas the first considered seven more active and nuanced methods of engagement, such as looking carefully at one’s retirement income statement.

The study concludes by recommending varied and creative communication to encourage engagement

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