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Speaker 1: Since two thousand fifteen, nineteen financial companies have been sued

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Speaker 1: for including their own investment products and their employees retirement plans,

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Speaker 1: and almost every mutual fund company can probably expect to

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Speaker 1: be sued about this. The lawsuits center on the claim

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Speaker 1: that companies like Morgan, Stanley, Wells Fargo, Charles Schwab and

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Speaker 1: JP Morgan are profiting by including poorly performing, high fee

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Speaker 1: funds of their own in employees for own K plans.

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Speaker 1: As a result, said the employees, they've paid millions of

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Speaker 1: dollars in excess fees for investments in their four oh

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Speaker 1: one K accounts. So far, seven judges have sided with

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Speaker 1: the employees who are suing the companies and refused to

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Speaker 1: grant motions to dismiss the cases, so the litigation continues.

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Speaker 1: Bloomberg b NA has been analyzing these lawsuits and the

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Speaker 1: retirement plans of financial companies that issue mutual funds and

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Speaker 1: investment products. Here to talk with us is Bloomberg BNA

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Speaker 1: Senior Legal Editor Jacqueline Willie. Jacqueline, Welcome to the program.

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Speaker 1: How widespread is this issue of financial companies offering their

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Speaker 1: own products in their employees for oh one K plans?

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Speaker 1: Well it's extremely widespread. Actually, I I look through the

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Speaker 1: government filings of a hundred different companies that offer mutual

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Speaker 1: funds or other investment products, and I found that ninety

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Speaker 1: two of them have at least some portion of the

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Speaker 1: four oh one K invested in their own funds. So

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Speaker 1: I'd say that's pretty widespread. So Jack Link, considering these

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Speaker 1: lawsuits and the fact that they are going forward, why

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Speaker 1: don't the companies take the time now to reduce or

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Speaker 1: eliminate the in house funds in their four oh one

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Speaker 1: K plans. Well, I'm sure they're you know, at least

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Speaker 1: having conversations about that um. But to be honest, I

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Speaker 1: spoke with some defense attorneys and say, you know, it

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Speaker 1: looks really bad if if a company offers mutual funds

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Speaker 1: to investors on the open market and then they you know,

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Speaker 1: put a competitor's funds and their plan. You know, that

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Speaker 1: sends a signal to the market that you know, these

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Speaker 1: aren't good investments, they aren't good deals, and and they

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Speaker 1: don't make sense for you. So I think there's a

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Speaker 1: you know, a really strong in things against that. In

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Speaker 1: the financial industry. They want to show that these funds

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Speaker 1: are good and offer them to their own employees. Well,

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Speaker 1: so in the lawsuits themselves, what precisely are the plaintiffs

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Speaker 1: claiming is the problem? I mean, you know, presumably the

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Speaker 1: companies do stand behind their own funds and think that

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Speaker 1: the funds are good. So what's so terrible about offering

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Speaker 1: them to their employees. Well, I want to be clear, Um,

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Speaker 1: nothing is illegal about it. Um on its face. What

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Speaker 1: it kind of comes down to is this idea of

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Speaker 1: self dealing. Um. You know, the law imposes a really

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Speaker 1: high standard of care on the people that run for

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Speaker 1: a one K plans. They have to act as fiduciaries

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Speaker 1: for the people in the plan, and so you know

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Speaker 1: they have to make choices about what goes in the

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Speaker 1: plan based on what's best for those participants. And what

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Speaker 1: they're saying here in these lawsuits is that you know,

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Speaker 1: they weren't thinking about what's best for me, they were

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Speaker 1: thinking about what lines their pocket. There was self dealing,

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Speaker 1: I guess, is what you'd say it would come down to.

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Speaker 1: So you know, it's it's not illegal on its face,

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Speaker 1: but if you can show you know that it hurt

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Speaker 1: the participants and that there was some conflicted decision making. Um,

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Speaker 1: that seems to be something that a lot of judges

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Speaker 1: or at least letting get past the motion to dismiss stage.

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Speaker 1: So are these funds poorly performing compared to the average

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Speaker 1: on the market. You know, the litigation really hasn't gotten

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Speaker 1: that far to have that, um, to have that decided.

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Speaker 1: That's certainly an allegation, and a lot of these lawsuits um,

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Speaker 1: but as of right now, what we have are a

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Speaker 1: lot of judges saying, you know, we we just don't know.

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Speaker 1: We need to go through discovery, we need more facts,

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Speaker 1: we need some comparisons. So that's certainly the allegation. Um.

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Speaker 1: But we haven't had to judge go out and actually

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Speaker 1: say that yet. And it's also the allegations are also

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Speaker 1: that they're paying excessive fees at times, isn't it? Yes? Um,

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Speaker 1: You know a lot of these cases will compare you know, um,

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Speaker 1: if you take, for example, like an index fund, um,

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Speaker 1: since it's tracking a specific bundle of investments, you know,

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Speaker 1: an index fund from one company versus an index fund

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Speaker 1: from another company, you know, the difference is large cost.

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Speaker 1: So if you're including you know, your own index fund

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Speaker 1: and the plan that has costs five or six times

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Speaker 1: higher than one, that's you know available from a competitor.

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Speaker 1: That's that's a big red flag and that's been driving

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Speaker 1: a lot of litigation. So has any of the litigation

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Speaker 1: given other companies who haven't been sued yet guidance to

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Speaker 1: avoid litigation in the future. I don't, Yeah, I think

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Speaker 1: so for sure. UM. You know a lot of these

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Speaker 1: cases outlined some of the particularly um I don't want

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Speaker 1: to say unsavory, but practices that really draw attention from

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Speaker 1: plaintiff lawyers. UM. Like I mentioned with the index funds,

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Speaker 1: you know, offering your own index fund when a competitors

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Speaker 1: would be much cheaper, that's something that's gonna, you know,

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Speaker 1: raise eyebrows. Another thing is UM when you offer a

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Speaker 1: fund that's brand new, that doesn't have any investors outside

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Speaker 1: of the plan. You know, if you're if you're running

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Speaker 1: a four oh one k plan, you're supposed to be

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Speaker 1: giving your workers good investments that have proven track records.

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Speaker 1: And if you give them a brand new fund that

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Speaker 1: no one else has invested, and that's another thing that

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Speaker 1: raises eyebrows and judges have been skeptical of. So far,

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Speaker 1: have any companies Jacqueline already made changes as a result

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Speaker 1: of this. These litigations. Well, I can't say that it

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Speaker 1: was definitely as a result of the litigation. But yes,

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Speaker 1: we've seen a couple of companies UM in the last

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Speaker 1: few years remove, you know, all funds from their plans.

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Speaker 1: These aren't companies that were sued UM. But I wont

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Speaker 1: Putnam Investments, which is it's still fielding a lawsuit. UM.

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Speaker 1: I believe they added six brand new funds that weren't

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Speaker 1: affiliated with the company UM shortly after being sued over

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Speaker 1: all the proprietary funds. So yes, it seems like some

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Speaker 1: companies are making changes to their investment lineups based on

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Speaker 1: this UM the series of lawsuits, but you could never

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Speaker 1: say for sure what the motivation is. So Jacqueline, you

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Speaker 1: said that according to the Bloomberg NA study, nine two

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Speaker 1: out of a hundred had some portion of the four

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Speaker 1: oh one k assets invested in funds affiliate with the company.

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Speaker 1: What did it show about those having a significant percentage,

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Speaker 1: let's say fifty or more. You know, the one thing

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Speaker 1: we found that was really interesting was that companies with

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Speaker 1: a really high percentage of in house funds actually had

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Speaker 1: UM larger average account balances. So to say that another way,

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Speaker 1: a company that offers a lot of its own funds

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Speaker 1: also has UM employees with bigger four o one K accounts,

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Speaker 1: which was very interesting and sort of looked like a

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Speaker 1: point in the favor of the companies if they were

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Speaker 1: having these higher balances. I did speak to a plaintiff

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Speaker 1: lawyer who said, you know, correlation doesn't prove causation, and

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Speaker 1: he said that he would attribute that more to higher

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Speaker 1: salaries at those companies and things like lower employee turnover.

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Speaker 1: So I don't I don't think I could say that

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Speaker 1: one causes together, but there is a correlation with more

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Speaker 1: in house funds and higher average account balances. In about

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Speaker 1: thirty seconds we have left, do you think that UM

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Speaker 1: the answer is going to be getting rid of all

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Speaker 1: their own funds or is it just going to be

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Speaker 1: giving more choice and knowledge to UH their employees when

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Speaker 1: they pick from an array of funds. It might be

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Speaker 1: something like that, and it might just be something as

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Speaker 1: simple as as lowering the fees. You know, the fees

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Speaker 1: in the four oh one K industry have been trending

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Speaker 1: down for the last several years, and I think that,

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Speaker 1: you know, this type of litigation is a big factor

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Speaker 1: in that. So we might just see better deals for

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Speaker 1: the participants, which would be probably good for them. That's

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Speaker 1: Bloomberg BNA Senior Legal Editor Jacqueline Willie. Thank you, Jacqueline

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Speaker 1: for being here on Bloomberg Laud today