Compliance July 21, 2021

MetLife Accused of Favoring Proprietary Index Funds in 401(k)

The lawsuit suggests that MetLife had an imprudent and disloyal preference for its index fund products, in part because of fees and tax deductions it received.

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Current and former participants of the MetLife 401(k) Plan have filed a lawsuit alleging the plan’s fiduciaries violated the Employee Retirement Income Security Act (ERISA)’s duties of loyalty and prudence “by applying an imprudent and disloyal preference for MetLife index fund products within the plan, despite their poor performance, high costs and lack of traction among fiduciaries of similarly sized plans.”

According to the complaint, the defendants’ conduct has cost plan participants millions of dollars over the period defined in the lawsuit. The proposed class action suit seeks to remedy the defendants’ conduct and to obtain appropriate monetary, equitable and other relief as provided by ERISA.

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In a statement to PLANADVISER, MetLife said it does not comment on pending litigation.

“The marketplace for index funds is highly competitive, with several companies offering index fund products that track benchmark indexes with a high degree of precision, while charging very low fees,” the lawsuit says. “In contrast, less competitive firms sometimes charge fees that are five or more times higher than the fees charged by leading companies for managing an index fund that tracks the exact same index.”

The plaintiffs contend that given the competitiveness of the index fund marketplace, the evolution of available products and the level of fees, “prudent managers of large investment portfolios that include index fund holdings will closely monitor the cost and performance of the index funds in their portfolio, while regularly comparing that cost and performance to the fund’s closest competitors, making changes when warranted based on the fees, tracking error and institutional quality of available products.”

They concede that using proprietary options is not per se a breach of the duty of prudence or loyalty under ERISA, but, they argue, a fiduciary’s process for selecting and monitoring proprietary investments is subject to the same duties of loyalty and prudence that apply to the selection and monitoring of other investments. “Based on the defendants’ retention of proprietary index funds in lieu of less expensive and otherwise superior nonproprietary index fund alternatives, it is reasonable to infer that the defendants’ process for selecting and monitoring the MetLife index funds was imprudent and tainted by self-interest,” the complaint states.

The lawsuit explains that each of the MetLife index funds charge an annual operating expense that is paid to MetLife and deducted from the rate of return of the fund. In addition, because the MetLife index funds are structured as separate accounts, MetLife claims a tax deduction on dividends received on the assets owned by MetLife on behalf of the plan. “If the defendants had not invested the plan’s assets in the MetLife index funds, MetLife would have received significantly less money from investment management fees and the … tax benefit,” the plaintiffs claim.

The complaint includes charts intended to show the MetLife index funds are considerably more expensive than otherwise identical alternatives being used in other large plans. “Had the defendants been monitoring the expenses of these index funds and performed a reasonable investigation of marketplace alternatives consistent with the practice of other fiduciaries of 401(k) plans, they would have replaced the MetLife index funds with one of the more competitive alternatives in the marketplace,” the lawsuit contends.

The plaintiffs also allege that the MetLife index funds were of lower quality than other options when it came to tracking the underlying index. According to the complaint, for the five-year period ending in 2019, two of the seven index funds performed as expected, meaning equal to the benchmark minus expenses, five index funds performed worse than expected, and no index funds performed better than expected. “A prudent fiduciary managing the plan through a process that was not tainted by self-interest would have removed the MetLife index funds from the plan,” the complaint says.

Deals & People July 21, 2021

With Prudential Acquisition, Empower Aims for Growth Up to 3x Faster Than Other Recordkeepers

The CEO of the nation’s No. 2 recordkeeper says Empower’s focus will continue to be on a best-in-class user experience.

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Following this morning’s announcement that Empower Retirement is acquiring the full-service retirement business of Prudential Financial, Empower CEO Ed Murphy spoke with PLANADVISER about the firm’s plans for additional acquisitions and what this latest deal means for the plan advisers, participants and sponsors it serves. Murphy also touched on why Empower was interested in Prudential’s recordkeeping business in the first place, and how it will be integrated into the Empower platform.

“We have 1,900 associates from Prudential [coming over],” Murphy told PLANADVISER. “These are long-tenured people with tremendous domain expertise. Prudential’s recordkeeping business has a client base of 4,300 plan sponsors, many of which have been with Prudential for a long time. It is a great service provider [that obtains] high-end provider scores. We are looking forward to building on that.”

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Murphy went on to say that Prudential’s back-office recordkeeping system has “some compelling capabilities” and that it offers a powerful “nonqualified platform we aim to put to use with existing and prospective customers. It has a solid relationship with a third-party defined benefit [DB] administrator we think we can leverage.”

Murphy then said Prudential’s GoalMaker asset allocation strategy will be an advantage. GoalMaker is a tool that helps participants choose a professionally designed investment portfolio based on their investor style—conservative, moderate or aggressive—and years to retirement. “We can support and leverage it within our environment,” Murphy noted. 

In short, he said, there were “several aspects” to Prudential’s recordkeeping offerings that were too attractive to pass up. 

Today’s Prudential news does not change Empower’s current initiatives, Murphy added. Empower will continue to make substantial investments in technology and products to improve the experience and service for participants, he said.

“All those things will continue,” including investments specifically for retirement plans aimed at executives, Murphy said. The end goal of all of these efforts, the Empower CEO added, is to improve participants’ retirement success.

Murphy said this acquisition further solidifies Empower’s position as the No. 2 recordkeeper in the nation. Empower ranked No. 2 in PLANSPONSOR’s 2020 Recordkeeping Survey by total 401(k) assets, behind Fidelity Investments.

Murphy added that Empower plans to continue growing its participant and asset base at a rate two to three times its competitors. “That is the best marker we can think of,” he said.

For its part, Prudential says it will continue to participate in the institutional and individual retirement market, serving retirees, annuitants and employers through its institutional investment products business, as well as through income and investments solutions provided by its individual annuities business and PGIM, its global asset management subsidiary. Following the close of the transaction, Prudential’s retirement business will consist of pension risk transfer, international reinsurance, structured settlements and institutional stable value wrap product lines.

Prudential expects to use the proceeds from the transaction for general corporate purposes. The company said it now expects to return $11 billion to shareholders through 2023, up from the $10.5 billion announced in May, and it intends to reduce financial leverage and enhance its financial flexibility.

The transaction, which is expected to close in the first quarter of 2022 pending customary regulatory approvals, will increase Empower’s participant base to 16.6 million and its retirement services recordkeeping assets to approximately $1.4 trillion administered in approximately 71,000 workplace savings plans.

Empower will acquire Prudential’s retirement services businesses with both a share purchase and a reinsurance transaction.

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