Plan Sponsor Challenged in a Lawsuit for Using Untested Hewitt Funds

Participants in the FirstGroup America, Inc. Retirement Savings Plan have filed a court action under the Employee Retirement Income Security (ERISA), against FirstGroup America, Inc., Aon Hewitt Investment Consulting, Inc. and other fiduciaries of the plan alleging they breached their fiduciary duties by engaging in a radical redesign of the plan’s investment menu that was designed to benefit Hewitt rather than the participants and beneficiaries of the plan, and have adhered to this imprudent menu design in spite of evidence that it has caused significant and ongoing damage to the plan.

According to the complaint, the defendants removed a large number of established funds in the plan that were performing well (at Hewitt’s urging), and replaced them with an unproven set of newly launched funds from Hewitt that were inappropriate for the plan and had not been adopted by the fiduciaries of any other retirement plans. In the process, the defendants transferred more than one-quarter billion dollars in plan assets (more than 90% of the plan’s total assets) into these new and untested funds, and left participants with no other meaningful investment options.

The plaintiffs say that since these experimental funds were added to the plan in 2013, they have consistently underperformed their benchmarks, and have underperformed the funds they replaced by tens of millions of dollars. In spite of this, the defendants have continued to retain these funds,

The plaintiffs cite Tibble v. Edison, which found, “[A] trustee has a continuing duty to monitor trust investments and remove imprudent ones. This continuing duty exists separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset.”

According to the complaint, when Hewitt initially consulted with FirstGroup, it appears that Hewitt attempted to provide independent advice to the plan, and helped FirstGroup construct and maintain an investment lineup for the plan consisting of a diverse set of investment products from a number of different fund managers. This changed, however, when Hewitt started a new business venture and began offering its own line of investment products (referred to as the Hewitt Funds), which it introduced to the 401(k) plan marketplace on or about September 30, 2013.

In connection with the launch of the Hewitt Funds, Hewitt attempted to leverage its existing consulting client base to attract investors. The overwhelming majority of 401(k) plan sponsors that it advised rejected the Hewitt Funds for their plans through their own fiduciary screening process. However, immediately after the Hewitt Funds were launched, FirstGroup became the first employer in the country to include them in its 401(k) plan, and even went so far as to make the Hewitt target-date fund series the plan’s default investment option.

Even if certain changes to the plan had been warranted, the complaint states, it was not prudent or in the best interests of plan participants to include Hewitt’s untested funds in the plan investment lineup and invest almost all of the plan’s assets in those funds. “As a general rule, fiduciaries of other retirement plans generally require a performance history of three or more years before considering an investment for a retirement plan,” the complaint says.

The plaintiffs seek to remedy this unlawful conduct, recover the plan’s losses, disgorge the profits that Hewitt wrongfully received, prevent further mismanagement of the plan, and obtain other appropriate relief as provided by ERISA.