Familiar Arguments In New JP Morgan ERISA Challenge

The 401(k) retirement plan offered by JPMorgan Chase Bank to its own employees is now the target of a second Employee Retirement Income Security Act (ERISA) lawsuit, this one filed in the U.S. District Court for the Southern District of New York.

The main crux of the challenge, labeled Orellana vs JP Morgan, is very similar to the previous suit filed in late January. According to the lead plaintiff, who is seeking class certification for other similarly situated plan participants, the JP Morgan plan sponsors “violated their fiduciary duties by larding the plan with proprietary fund investment options that charged excessively high fees that inured to the benefit of affiliates of JPMorgan and one of JPMorgan’s closest business partners, BlackRock Institutional Trust Company, N.A. (“BlackRock”), at the expense of plan participants.”

Plaintiffs argue that, instead of acting for the exclusive benefit of the plan and its participants and beneficiaries, “defendants acted for the benefit of themselves—by forcing the plan into costly investments managed by JPMorgan and BlackRock. Rather than engage in a systematic, arm’s-length review of available Plan investment options, JPMorgan sought out investment options that allowed its affiliates and business partners to reap outsized fees to the detriment of plaintiff and members of the Class. During the Class Period (defined herein), half of all Plan investment options were affiliated with JPMorgan entities, while more than 70% were affiliated with either JPMorgan or BlackRock.”

Those retirement industry professionals closely following ERISA litigation will recognize many of the themes called up in this complaint—and they will probably disagree with many of them. For example, the complaint bemoans the inclusion of active management funds and argues their inclusion robbed investors of an opportunity to save on fees by investing passively. This is despite the well-established standard that investments have to be reasonably priced, rather than the cheapest possible, to meet the requirements of prudence and care under ERISA.

This is how the plaintiffs make the case: “These funds were also actively managed, and therefore charged higher fees, even though passively managed investment options were available that would have allowed plan beneficiaries to utilize similar strategies during the class period at a significantly lower cost. For most of the class period, these JPMorgan-affiliated investment options were the priciest in the plan. For example, the JPMIM-managed Mid Cap Growth Fund charged fees of 0.93%, while the Vanguard Mid-Cap Growth Index Fund Admiral also utilized a mid-cap growth strategy and had an annualized expense ratio of only 0.08%.”

For its part, JP Morgan tells PLANADVISER, “We are reviewing the complaint. We disagree with the fundamental allegations in the complaint and believe the case is without merit.” 

NEXT: Reading further into the complaint 

The complaint goes on to argue that, “instead of conducting arm’s-length negotiations to offer the best investment options at the lowest cost, JPMorgan gave preferential treatment to its longtime business partner, BlackRock, in selecting Plan investment options … Defendants favored furthering JPMorgan’s business relationship with BlackRock over the interests of Plan beneficiaries by choosing excessively expensive BlackRock-managed funds for the plan and by funneling a large portion of the Target Date Funds, which made up 9 of 30 investment options, into BlackRock-managed funds.”

Plaintiffs suggest that, during the class period, JPMorgan- and BlackRock-affiliated funds constituted over 70% of all plan investment options.

“On January 25, 2017, in a stunning example of their tight-knit business relationship, BlackRock shifted $1 trillion of its assets under management into JPMorgan custody, in one of the largest asset transfers of all time. JPMorgan will reportedly earn tens of millions of dollars in annual fees from this arrangement,” plaintiffs posit.

The text of the complaint also calls out JP Morgan’s previous difficulties starting in 2014 with Securities and Exchange Commission (SEC) compliance related to “the funneling of client assets into JPMorgan-affiliated funds rather than third-party investment options in order to generate investment fees.” The suggestion is that similar patterns played out within the firm's own retirement plan. 

“As intense scrutiny fell on JPM Bank’s self-dealing as a result of the SEC investigation,” plaintiffs claim, “JPM Bank began to belatedly reduce the fees charged by its proprietary funds and by BlackRock funds to plan beneficiaries, and in some cases eliminated these investment options altogether. For example, effective November 6, 2015, the Mid Cap Growth Fund, a JPMIM-managed fund that was the most expensive plan option, was eliminated from the plan in favor of the S&P Mid Cap 400 Index Fund. Fees for this mid cap investment option subsequently plummeted from 0.93% to 0.04%, a 96% reduction. Similarly, the Core Bond Fund and the Small Cap Core Fund, both actively managed by JPMIM, were restructured into a lower cost collective trust and a lower cost separate account, respectively.”

Additional examples are cited by the plaintiff, driving to the conclusion that, “while the regulatory scrutiny and uncovering of systematic self-dealing and fiduciary breaches by JPM Bank and other JPMorgan affiliates has spurred much needed expense reform in the plan, plan beneficiaries had already paid tens of millions of dollars in excessive fees during the class period.”

The full text of the complaint is here.