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Compliance July 20, 2016
Cetera Named in Small Plan Excessive Fee Suit
As investment adviser to the Checksmart 401(k) plan, Cetera Advisor Networks, has been accused of breaching fiduciary duties by only making available high cost funds to the plan.
Reported by Rebecca Moore
A participant in the Checksmart Financial 401(k) Plan has filed a lawsuit contending fees for funds offered in the plan are too excessive.
The lawsuit accuses Checksmart; its plan committee, which only has one member; and the plan’s investment adviser, Cetera Advisor Networks, of only offering expensive and unsuitable actively managed mutual funds as investment options in the plan without an adequate or appropriate number of passively managed and less expensive mutual fund investment options. According to the complaint, most investment options have expense ratios of 88 to 111 bps, which the document says are four or more times greater than retail passively-managed funds—which were not made available to the plan and its participants during the class period. In addition, the average expense of all funds is 104 bps.
Perhaps with the defendant Cetera in mind, the complaint notes that the Employee Retirement Income Security Act (ERISA) also imposes explicit co-fiduciary liabilities on plan fiduciaries, providing a cause of action against a fiduciary for knowingly participating in a breach by another fiduciary and knowingly failing to cure any breach of duty. It also asks that “to the extent that any of the defendants are not deemed a fiduciary or co-fiduciary under ERISA, each such defendant should be enjoined or otherwise subject to equitable relief as a non-fiduciary from further participating in a breach of trust.”
The compliant points out there are virtually no Vanguard index funds offered in the plan, and mentions that retail shares of the Vanguard S&P 500 Index Fund have an expense ratio of 16 basis points, while Admiral Shares (which requires a minimum $10,000 investment—an amount the plan would easily cover) has an expense ratio of 5 basis points.
The lawsuit specifically calls out the plan’s ‘Lifestyle Portfolios’—risk-based investment options that hold $13.25 million, or 52.63%, of the approximately $25 million in plan assets—saying not only are they the most expensive plan investments, but they materially underperformed the S&P 500 total return under every benchmark.
“The plan has paid grossly excessive fees during the pertinent period for extremely underwhelming performance, and …defendants have engaged in significant breaches of fiduciary duty by (a) failing to ensure that the plan paid reasonable and appropriate fees, and (b) retaining these improper and imprudent investment options,” the compliant says.
The complaint in Bernaola v. Checksmart Financial LLC is here.