Two former employees of Pimco are suing the fund-giant’s owner, Allianz Asset Management of America, and fiduciaries of its 401(k) Savings and Retirement Plan, claiming they breached their duties of loyalty and prudence under the Employee Retirement Income Security Act.

The plaintiffs allege plan fiduciaries “loaded” the savings plan with proprietary funds from the Allianz family.

That allegedly cost plan participants millions of dollars in excessive fees during the statutory period of the claim, which the claim said begins October 7, 2009. The plan has had between 3,000 and 3,900 participants since then.

In 2013, the plan’s total expenses were 75 percent higher than the average retirement plan of similar size, costing participants $2.5 million in excessive fees that year alone, claim the plaintiffs. The Savings and Retirement Plan held $772 million in assets at the end of 2013.

The plaintiffs’ attorneys argue that the plan was one of eight others among 551 defined contribution plans with assets between $500 million and $1 billion that had total plan costs greater than 74 basis points of total assets.

Citing an Investment Company Institute report, the complaint says in 2012 the total plan fee average for plans with $500 million to $1 billion in assets was 44 basis points.

Those high costs are “entirely” attributable to the selection of Allianz’s proprietary mutual funds, claim the plaintiffs.

Many of those funds had little or no track record, according to the complaint.

“The fiduciary defendants have a pattern and practice of adding new and unproven mutual funds as investment options within the plan shortly after the new funds are launched, and even use the plan’s default investment option as a mechanism for providing seed money to these funds,” argue the plaintiffs’ attorneys.

In 2009, the participants were offered 43 fund options, all of them proprietary, and access to a brokerage window.

By 2013, that had changed to 45 proprietary mutual funds, and two proprietary Collective Investment Trusts, as well as access to a brokerage window.

At the end of 2013, plan assets had increased to $772 million, $672 million of which were in proprietary funds.

By comparison, at the end of 2009, the plan held $420 million in assets, $377 million of which was in Allianz proprietary funds.

Total plan costs in 2013 were about $5.9 million, or 0.77 percent of assets, a cost that was “outrageously high for a defined contribution plan with over $500 million in assets,” according to court documents.

Those costs can be traced to the high expense ratios of the plan’s proprietary funds, argue the plaintiffs.

For instance, the average expense ratio for domestic equity funds for large plans was 0.53 percent in 2012.

By comparison, the domestic equity proprietary funds offered in the 401(k) Savings and Retirement Plan in 2013 had expense ratios between 0.61 and 2.00 percent.

Allianz’s proprietary target-date funds’ expense ratios ranged between 0.57 percent and 0.70 percent, “well above the 0.47 percent average,” claim the plaintiffs’ attorneys.

Also central to the complaint is the allegation that Allianz was incentivized to offer new and unproven proprietary funds to participants.

Allianz Global Investors launched 28 new mutual funds since the beginning of 2008, while Pimco launched 57 new mutual funds in that time.

Because new mutual funds typically operate at a loss until they can attract significant assets, the complaint claims fiduciaries were incentivized to offer the new proprietary funds, which would drive costs down as those funds were later marketed to the larger institutional market.

“Prudent investors are typically wary of investing in new funds,” according to the complaint.

Many of the proprietary funds also allegedly underperformed benchmarks, further bringing into question fiduciaries’ duty to prudence in offering them, claim the plaintiffs.

One of the named plaintiffs left Pimco in 2013, after spending 13 years with the firm. The other left the company this past June after four years at the Newport, California-based firm.

The complaint was filed in U.S. District Court for the Central District of California.

Instant Insights /

Complaint says Allianz only offered proprietary funds to participants

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