Proprietary investment funds benefitted investment giant, not retirement savers
New York, NYA class action ERISA lawsuit filed on October 25 in the Southern District of New York claims that Goldman Sachs Inc. and related defendants failed to administer the Goldman Sachs Group Inc. 401k plan prudently and in the best interest of participants. Instead, Falberg v. Goldman Sachs Group Inc. alleges that Goldman managed the plan to benefit the company at the expense of participants. Plan fiduciaries did this by keeping many underperforming proprietary mutual funds in the investment lineup.
The combination of high fees and low yield may ultimately have cost between 30,000 and 35,000 participants a significant portion of their retirement security.
POOR INVESTMENT PERFORMANCE
The Complaint alleges that the fiduciaries of the 401k plan caused the plan to retain investment options for participants that an objective fiduciary would have removed because of their poor performance. One fund, allegedly the biggest single investment in the plan, was so unpopular with other investors that it lost half of its assets between August 2013 and February 2017. While underperforming proprietary funds saw large redemptions from other investors, plan fiduciaries retained these funds in the Plan, effectively protecting Goldman Sachs’s bottom line.
In addition, the Complaint claims that the 401k plan, and thus the plan participants overpaid for the proprietary options. For example, the 401k plan remained invested in the Goldman Sachs Mid Cap Value mutual fund, which charged the Plan between 0.73 percent and 0.76 percent of the pan’s balance, even though Goldman Sachs offered its institutional clients a separately-managed account utilizing the same investment strategy that would have cost at most 0.55 percent per year. The plan’s fiduciaries reportedly obtained lower-cost pricing for more than fifteen non-Goldman investment options in the Plan. They did not do so for the proprietary investments.
BUT WAS IT AGAINST THE LAW?
That is closer question. ERISA plan fiduciaries are not guarantors of investment performance for 401k plan participants. Rather, their responsibilities are to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses. In addition, fiduciaries must act prudently and must diversify the plan's investments in order to minimize the risk of large losses. They also must avoid conflicts of interest. In other words, they may not engage in transactions on behalf of the plan that benefit parties related to the plan, such as other fiduciaries, services providers or the plan sponsor.
In specific application to 401k plans, the generally means that fiduciaries must take care that the investment options made available permit the possibility that participants can succeed in saving for retirement.
In essence, the allegations of the Complaint are that the plan fiduciaries did not take this legally required care. Instead, they acted in the interest of the Goldman, the plan sponsor and the employer of the plan participants. If true, this would be in violation of the protections ERISA requires for plan participants and beneficiaries.
In general, this particular kind of breach of fiduciary lawsuit involving 401k plan participants depends heavily on statistical evidence. Plaintiffs are tasked with showing that participants in similarly situated plans during the same period of time, did much better than they did. The fiduciaries lack of care or conflict of interest is then inferred from this lackluster investment performance.
It is certainly not a “slam dunk” argument. It is considerably stronger, however, in situations where the plan sponsor is an investment house and financial services company, like Goldman, and the underperforming investment options are proprietary funds.
LEGAL OUTLOOK
In 2016, following by the denial of motions to dismiss similar self-dealing lawsuits brought against Deutsche Bank and Allianz, Goldman removed all proprietary funds from its 401(k) plan. Goldman did not reimburse participants for the underperformance of the improperly retained proprietary funds.
Deutsche Bank ultimately settled that lawsuit for $21.9 million. The Allianz settlement included $12 million in monetary contributions, along with mandated administrative changes and the appointment of an independent monitor for the investment lineup. Other 401k self-dealing lawsuits against Fidelity, Blackrock and SEI Investments are or have been in various different stages of litigation or settlement.
What does this bode for Goldman Sachs 401k plan participants? There are no guarantees in litigation or settlement negotiations, of course. Goldman’s removal of the proprietary funds from the investment lineup may suggest a sense of exposure, though. The advice, as always, to 401k plan participants, particularly in situations where the employer/plan sponsor includes proprietary funds or employer stock in the investment options is to monitor fees and investment performance carefully.
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