New York, NYOn November 20 MetLife Group and a group of participants in the MetLife 401(k) Plan agreed to settle an ERISA breach of fiduciary duty lawsuit for $4.5 million. In their amended class-action complaint, plan participants accused plan fiduciaries of failing to act solely in the interest of plan participants and beneficiaries by including proprietary investment options in the plan when similar, cheaper and better-performing investments were available in the marketplace.
ERISA fiduciary duties
ERISA Section 404 requires plan fiduciaries to act prudently and for the exclusive benefit of participants and beneficiaries and to pay reasonable expenses of the plan. The precise meanings of “prudence,” “loyalty” and “reasonable” are at the heart of the recent spate of 401k breach of fiduciary lawsuits.
Misplaced financial incentives
As outlined in the complaint, the essential problem with the MetLife 401k plan is a structural issue common to defined contribution ERISA pension plans. Old-fashioned defined benefit plans, which are now rare, guarantee a regular annuity payment to retirees. It is a knowable sum that does not fluctuate. The plan participant has no investment management responsibilities.
If, for example:
the plan’s investment results are poor; or
pension payments must be made for far longer than anticipated (perhaps because life expectancy increases dramatically); or
plan expenses skyrocket,
then the plan sponsor must put more money into the plan. The risk of poor management is borne by the plan sponsor.
A defined contribution plan, on the other hand, does not promise a participant a set, or “defined” benefit. The regular payment that a retiree receives on retirement is determined by his or her investment returns less an allocated share of plan expenses. Modern 401k plans generally offer participants a menu of investment options from which to choose.
The responsibility to monitor investment returns falls heavily on the participant. Retirement savers, regardless of time, inclination or financial sophistication, become their own investment advisors. The plan fiduciaries’ duty of prudence and loyalty seems to end with the selection and periodic monitoring of the options offered in the investment menu. Fiduciaries can prevail, when challenged by plan participants, by showing a regular, orderly process for doing these tasks.
Defined contribution plans shift the financial risk from the employer/plan sponsor to the worker/participant. Since the plan sponsor bears little risk, it has very little financial incentive to monitor the performance or cost of investment options. This shift arguably undermines the legal protection that ERISA was intended to afford workers.
Follow the money
The situation is even worse in Kohari v. MetLife Group, Inc. where the overly expensive and underperforming investment options were products sold and administered by MetLife, itself. Employees who participated in the MetLife 401k Plan, made pretax contributions from their MetLife salaries to include MetLife investment products in their 401k investment portfolios. Their investment returns (and thus the amount of retirement savings they would accumulate) were reduced by administrative fees paid to MetLife. MetLife was essentially managing to recoup a fraction of the salaries it had paid to workers.
This circular arrangement might have been justified had investment returns been stellar or the fees low. Neither of these conditions appears to have been true. According to the complaint, MetLife collected millions in fees from these funds and reaped millions more in tax benefits. Meanwhile, participants got the short end of the stick as these expensive proprietary funds depleted millions of dollars from their retirement savings.
Kohari challenges the plan fiduciaries’ selection and retention of all seven of the 401k plan’s proprietary index funds. The MetLife Index Funds cost several times more than otherwise identical funds that were offered by leading index fund managers such as BlackRock, the Northern Trust, State Street, Vanguard, and Fidelity. The MetLife Index Funds also tend to do an inferior job of tracking their underlying index.
Since 2015, the Plan has had between 33,000 and 42,000 participants and has held between approximately $6.4 billion and $7.3 billion in participants’ retirement savings. Since the plan always held more than $2 billion in index fund assets during the relevant period, it allegedly could have negotiated competitive rates with any of these leading index fund managers in line with other similarly sized plans. Despite their high fees, the plan’s investment advisory committee never considered removing any of the MetLife Index Funds from the plan or firing MetLife as the investment manager for the index funds.
In addition, the plan managers appeared to have lacked a formal process for managing the plan and reviewing the performance of the investment options offered to participants. Overall, the use of the MetLife Index Funds resulted in significant losses for participants, as each index fund underperformed comparable alternatives by roughly the difference in costs.
Settlement often best option
The fact that Kohari is poised to settle comes as no surprise. That seems to be the rule rather than the exception for recent 401k breach of fiduciary duty lawsuits. The settlement will spare both sides the expense and time involved in further ERISA litigation.
If you or a loved one have suffered losses in this case, please click the link below and your complaint will be sent to an employment law lawyer who may evaluate your ERISA Violation claim at no cost or obligation.