Interest fee

Equity attracts another lawsuit for excessive 401(k) fees

New lawsuit says decision to retain equity in 401(k) was ‘polluted by self-interest’, driven by ‘blind preference’ and ‘favouritism by defendants led to payment of management fees’ excessive investment”.

This time the complainant is current participant Sandy Schissler[i] bring an action against the trustees (and those who appointed them) of the Janus 401(k) and employee stock ownership plan. The lawsuit asserts that “at the expense of the plan and its participants and beneficiaries, the defendants breached their fiduciary duties with respect to the plan in violation of ERISA. Defendants applied an unfair and reckless preference for Janus Henderson’s proprietary funds under the plan, despite their poor performance and high costs. »

The lawsuit, filed in the U.S. District Court for the District of Colorado (Schissler v Janus Henderson US (Holdings) Inc.D. Col., #1:22-cv-02326, 9/9/22), asserts that “given the excessive fees charged by the Janus Henderson Funds and the availability of comparable or superior funds with significantly lower expenses, the compensation paid to Janus Henderson and its affiliates for their services was unreasonably high”.[ii]

‘Deduce’ Motion?

The suit itself[iii] is relatively short (just 31 pages), although the allegations are comparable to those typically made in excessive expense lawsuits, and particularly those involving proprietary funds. The lawsuit alleges that “even relative to other actively managed funds, Janus Henderson funds charged higher fees compared to non-proprietary alternatives selected by similarly sized plans. It is therefore reasonable to infer that defendants failed to properly investigate less costly and non-exclusive alternatives.

Leaving aside for a minute the notion of the reasonableness of this inference, the lawsuit asserts that “throughout the alleged period of recourse, the annual investment fees paid by plan participants amounted to at least 0.45% to 0 .50% of total plan assets, which is consistently higher than the average 401(k) plan of similar size. He goes on to state that “the exclusion of non-proprietary options from the plan (which are all passively managed investments) results in annual investment costs of at least 0.64% to 0.68% of the total plan assets. . In contrast, the average 401(k) plan with assets of $250 million to $500 million had total costs of 0.44% in 2016, down to 0.42% in 2018, the most recent year for which data on total plan costs are available.

The lawsuit goes on to note that in 2018, “the most recent year for which average expense data is available, Janus Henderson fund expenses exceeded the average expense ratio for funds in the same investment category. assets among plans with $250 million to $500 million in assets of 62% on average” and that, “if you look only at the top actively managed funds invested in similar styles to Janus Henderson funds, the excessive fees are around 25% and up to 131% above the average”.[iv]

‘Driven’ menu

The plan itself isn’t particularly large — the lawsuit says that from 2016 through the end of 2021 (the last year for which data is publicly available), the plan had between 1,700 and 1,900 participants and about 246 to $512 million in assets. That said, at the end of 2016, the plan’s investment menu included 53 investments, including 44 proprietary Janus Henderson funds, according to the suit.

While the plaintiff here denies any specific knowledge of the processes undertaken by the plan committee, the suit claims that from 2016 to 2021, “certain Janus Henderson funds were eliminated from the plan’s menu due to liquidations or mergers. But the Defendants did not choose to remove a single Janus Henderson exclusive investment from the menu of the Plan during this period. In fact, they often added new proprietary Janus Henderson funds soon after each fund was created. All of this means that at the end of 2021, the plan’s menu consisted of 50 investments, including 40 proprietary Janus Henderson funds.

“Based on defendants’ retention of proprietary funds over cheaper and superior non-proprietary funds, it is reasonable to infer that defendants’ process to select and monitor Janus Henderson funds was unfair and reckless.”

“Blind Preference”

The plaintiff asserted that the Janus Henderson fiduciary defendants “built and maintained an investment menu of the plan that was unlike any other plan of similar size. Claiming that the fiduciary actions were motivated by a ‘blind preference’, she notes that as of 2021, “all mutual funds offered by Janus Henderson were included in the plan. Indeed, all of the actively managed non-money market or non-inflation-protected investments among the Plan’s designated investment alternatives are the Janus Henderson Funds”, and which “no other defined contribution plan of similar size entrusts essentially all of his actively managed investments at Janus Henderson”.

The lawsuit notes that “when certain Janus Henderson funds were removed from the plan menu, it was solely as a result of fund liquidation or merger, and not the result of a fair or prudent review process” , and that “during the alleged class period, defendants added eight additional Janus Henderson Funds to the menu of the Plan. But not a single actively managed non-proprietary fund was ever added. And many of these Janus Henderson funds have were added to the plan at the same time as their creation. Beyond that, the lawsuit says that “the defendants’ reckless use of plan assets to seed new equity harmed plan participants.”

Ultimately, the lawsuit asserts that “defendants’ favoritism led to the payment of excessive investment management fees by participants to Janus Henderson, the failure to prudently monitor and dispose of proprietary Janus Henderson funds under- performance, and the inability to engage in a prudent and fair management process for selecting new Plan investments.

The lawsuit concludes that “defendants’ disloyalty and recklessness cost plan participants millions of dollars during the alleged class period” and that “plaintiff is bringing this action to remedy this unlawful conduct, recover losses plan and obtain other appropriate remedies as provided by ÉRISA.”

Will the court be convinced? Stay tuned.

[i] A participant since 2012, the suit claims that during the period in question, it was invested in at least the Janus Henderson Contrarian fund, the Janus Henderson Emerging Markets fund, the Janus Henderson European Focus fund, the Janus Henderson Flexible Bond fund , Janus Henderson Forty Fund, Janus Henderson Global Equity Income Fund, Janus Henderson Global Real Estate Fund, Janus Henderson Global Select Fund, Janus Henderson Global Technology Fund, Janus Henderson Growth and Income Fund, Janus Henderson High-Yield Fund, Janus Henderson Fund International Opportunities, Janus Henderson Overseas Fund, Janus Henderson Enterprise Fund, Janus Henderson Multi-Sector Income Fund, Janus Henderson Mid Cap Value Fund, Janus Henderson Research Fund, Janus Henderson Small-Mid Cap Value Fund, Janus Henderson Henderson Small Cap Value and the Janus Henderson Venture fund.

[ii] This is apparently taken from the total cost of the plan, as determined by the annual profiles of the BrightScope / ICI defined contribution plan, which “includes asset-based investment management fees, asset-based administrative and advisory fees , and other fees (including insurance fees) from Form 5500 and audited financial statements of DC plans covered by ERISA.

[iv] Here, we will simply note that comparisons with a generic “average” as a reference have their drawbacks.