Another Provider’s TDFs Called Out in ERISA Lawsuit

Participants in the CHS/Community Health Systems, Inc. Retirement Savings Plan have filed a lawsuit against the company, its retirement plan committee, Principal Life Insurance Company, Principal Management Corporation and Principal Global Investors, LLC accusing them of breaching their fiduciary duties through their disloyal and imprudent management of the plan and its investments.

The plaintiffs are asking to recover the losses caused by the defendants’ fiduciary breaches, disgorge the profits earned by Principal as a result of these breaches, prevent further mismanagement of the plan and its investments, and obtain equitable and other relief as provided by the Employee Retirement Income Security Act (ERISA).

In a statement to PLANADVISER, Principal said: “On August 8, 2019, a lawsuit was filed in the U.S. District Court for the Middle District of Tennessee naming Principal Life Insurance Company, Principal Management Corporation, and Principal Global Investors, LLC as defendants. The lawsuit is related to management of the Community Health Systems, Inc. (CHS) Retirement Plan’s investments. We disagree with the allegations in this lawsuit and will vigorously contest them. Principal is one of many companies in the industry that have had lawsuits filed against them making these kinds of claims.”

Specifically, the complaint says the CHS defendants breached their fiduciary duties by maintaining excessively expensive and poorly performing index funds in the plan that were managed by Principal.

According to the complaint, the marketplace for index funds is highly competitive, with several companies offering index fund products that track benchmark indices with a high degree of precision, while charging very low fees. It alleges the CHS defendants did not give any serious consideration to these competitive index fund offerings in the marketplace, and, instead, used Principal’s proprietary index funds, despite fees that were several times higher than marketplace alternatives that tracked the exact same index.

In addition, the plaintiffs say, not only were the Principal index funds far more expensive, they were also of significantly lower quality. Compared to marketplace alternatives, Principal’s index funds deviated further from the benchmark index, and consistently had the worst performance even on a pre-fee basis. “Given the high fees and history of poor performance of Principal’s index funds, a prudent fiduciary acting in the best interests of the plan’s participants would have removed these index funds from the plan and replaced them with more competitive marketplace alternatives,” the complaint says. “The CHS Defendants’ failure to do so has cost participants millions of dollars in excessive fees and lost investment returns.”

In addition, the plaintiffs are charging the CHS defendants with failing to properly monitor Principal, and failing to appropriately address its conflicts of interest in managing the plan’s target-date funds (TDFs).

According to the complaint, because these TDFs are organized as separate accounts for the plan, Principal owes fiduciary duties to the plan and its participants with respect to the management of those accounts. However, it alleges that contrary to its fiduciary duties, Principal engaged in self-serving conduct that harmed plan participants, and the CHS defendants have failed to address these fiduciary breaches or take any remedial action.

In managing the TDF separate account portfolios, Principal selected and retained its own proprietary funds as underlying investments, including high-cost Principal index funds, the complaint says. In addition, it alleges Principal retained higher-fee versions of other underlying proprietary investments in the TDF separate accounts to increase its own fee revenue, at the expense of plan participants. For example, as of 2017, the lowest-cost share class for Principal’s mutual funds are R6 shares. Yet, Principal consistently used Institutional shares for the mutual funds held by the TDF separate accounts despite the availability of less expensive R6 shares. As another example, Principal utilized the mutual fund version of the MidCap Growth III, SmallCap Value II, and SmallCap Growth I funds as underlying investments in the TDF separate accounts, even though identical annuity subaccount versions of these funds were available with fees that were 20% to 30% lower. In yet another instance, Principal used the mutual fund version of the Diversified Real Asset fund, even though a collective investment trust (CIT) version of this fund with lower fees was available, and was used by Principal as an underlying investment in other target-date products it managed.

The plaintiffs contend that given Principal’s conflicts of interest, the CHS defendants should have closely scrutinized Principal’s choice of investments for the TDF separate accounts and its management of those accounts. Moreover, the CHS defendants should have been especially cognizant of the problems associated with the Principal index funds in the TDF separate accounts, given that the CHS defendants included those index funds as standalone funds in the plan. “Yet, the CHS Defendants took no action to address Principal’s mismanagement of the TDF separate accounts and left those separate accounts undisturbed in the plan. This was imprudent and improperly placed Principal’s interests ahead of plan participants,” the complaint says.

Based on this conduct, the plaintiffs assert a claim against all defendants for breach of their fiduciary duties of loyalty and prudence (Count 1), and assert a claim against the CHS defendants for failing to properly monitor other fiduciaries (Count 2).

Recently, a lawsuit was filed alleging fiduciaries of the Walgreen Profit-Sharing Retirement Plan selected and kept TDFs in the plan that underperformed their benchmarks. And, retirement plan fiduciaries at Intel were accused of failing to properly monitor and evaluate “unconventional, high-risk allocation models” adopted within the company’s custom TDFs.

These lawsuits target the actions a litigation firm has listed that it is investigating for potential lawsuits over TDFs in retirement plans.