Two recently filed class-action claims against bank holding companies underscore the fiduciary risk in offering proprietary mutual funds to 401(k) participants.

Read: DOL files suits, wins judgments

M&T Bank Corp.

In early May, participants in M&T Bank Corp.’s defined contribution plan filed suit in U.S. District Court for the Western District of New York, alleging fiduciaries of the Buffalo, New York-based holding company’s 401(k) plan engaged in self-dealing by offering participants underperforming proprietary mutual funds manufactured by company affiliates.

The suit claims the proprietary funds were “known for extraordinarily high fees and chronic underperformance,” according to court documents.

Read: Assessing ERISA litigation trends in 2016

In late 2010, eight of the plan’s 23 investment options were M&T proprietary mutual funds with expense ratios that were on average 90 percent higher than similar funds offered in similarly sized plans. All but one of those funds had underperformed their benchmarks over the previous ten-year period. By 2013, the plan held $1.9 billion in assets.

Instead of honoring duties to monitor fund performance and provide prudent investments, M&T fiduciaries allegedly doubled down in May 2011 after the purchase of Wilmington Trust. Shortly after that acquisition, plan fiduciaries added six out of Wilmington Trust’s nine proprietary funds, “despite their high expenses, and poor or non-existent performance history,” claim the plaintiffs.

Over the ensuing five years, fiduciaries kept the proprietary funds in the menu, removing “a few” only because the funds were closed. All told, participants lost “tens of millions” in damages, say attorneys for the participants.

Of the roughly 1,450 401(k) plans in the country with more than $500 million in assets, not a single plan, other than M&T’s, offers any of the Wilmington family of funds, underscoring their imprudence, claim the participants.

M&T’s investment committee also failed their duty to loyalty with non-proprietary offerings, the claim says. At the end of 2015, $700 million in plan assets were held in T.Rowe Price mutual funds, when identical investments were available in T.Rowe Price Collective Investment Trusts or Separate Managed Accounts at a much lower cost.

Participants allege fiduciaries had “no excuse” for failing to use CITs or separate accounts, and that the decision to use more expensive mutual funds was motivated by revenue-sharing payments, which reduced M&T’s costs of administering the plan while increasing the ultimate costs to participants “in an amount many times greater than M&T’s cost savings,” according to the suit.

In other instances, costlier shares of third-party investments were offered when institutional shares, which typically don’t have revenue-sharing agreements, were readily available.

Over the years, M&T earned “millions of dollars” in investment management fees through the proprietary funds. Six of the eight investment committee members were corporate officers at M&T Bank, according to court documents.

BB&T Bank Corp.

In April, a federal judge for the middle district of North Carolina denied BB&T Corp.’s motion to dismiss a claim brought last year by participants in the Winston-Salem, North Carolina-based bank’s 401(k).

Prior to 2009, the plan’s investment lineup was comprised entirely of BB&T proprietary funds. By the end of that year, the plan held more than $1.6 billion in assets for more than 27,000 participants.

By 2010, plan fiduciaries had begun diversifying investment brands, but still offered nine proprietary funds and a company stock fund among the 25 total menu offerings.

At the end of 2013, plan assets had grown to $2.72 billion in assets for 32,000 participants. Most of the plan’s assets were held in proprietary or affiliated funds or company stock: More than $1 billion was invested in Sterling Capital, a BB&T subsidiary, mutual funds; $650 million was held in company stock; and $174 million was held in a BB&T managed fixed account.

The upshot of the allegedly expensive, imprudent proprietary funds was participant losses ranging up to $32 million over the past six years, court papers say.

Total plan costs in 2013 were more than $14 million, or 52 basis points, putting the plan in the 90^th percentile for the most expensive plans with more than $1 billion in assets. The average plan costs for plans with $1 billion or more is 33 basis points, say the plaintiffs, citing data from the Investment Company Institute.

The “excessive costs can be attributed almost entirely to Defendants’ self-serving selection of high-cost, proprietary mutual funds to support their own bottom line,” allege attorneys for the plaintiffs.

BB&T also served as the plan’s recordkeeper. Between 2009 and 2012, BB&T received indirect compensation from its own and third-party funds that was two to three times greater than the cost of administering the plan, according to court documents.

Instant Insights /

2 allegations of self-dealing underscore fiduciary risk of proprietary funds

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