The plan sponsor fiduciary andco-fiduciary advisor to a $25 million 401(k) plan are being sued inU.S. District Court for the Southern District of Ohio for allegedlyoffering high-cost, low performing investment options to planparticipants.

|

The Checksmart Financial 401(k) plan, sponsored by Dublin,Ohio-based Checksmart Financial, which operates retail pay loanstores in eight states, had more than 2,500 participants in planyear 2014, according to Form 5500 data on Brightscope.com. Onlyabout 1,700 of those participants had account balances.

|

According to court documents, Pagle Helterbrand, whose LinkedInpage says is the company’s senior vice president of human resourceswith more than 25 years at Checksmart, is the lone plan sponsorfiduciary, and was the lone member of the investment committee tothe plan.

|

Related: SCOTUS orders 5th Circuit to reconsiderVerizon pension risk transfer

|

Cetera Financial Group, a co-fiduciary to plan, is also named asa defendant. Cetera inherited the Checksmart plan when it acquiredbroker dealer Walnut Street Securities in 2013. The plan’srecordkeeper, John Hancock, is not named in the suit.

|

According to the complaint, the Checksmart plan offersparticipants two sets of investment options: the LifestylePortfolio suite, consisting of five different John Hancock activelymanaged funds designed for different risk tolerance and investmenthorizons, and a self-directed option for participants wantingautonomy managing retirement assets.

|

Related: Plan sponsors tell all

|

As industry studies report more plan sponsors are winnowinginvestment menus, Checksmart’s plan was stacked with nearly 50 fundoptions, according to the plan’s 2014 Form 5500 filing, which isavailable on Brightscope.com.

|

The fees on those investments are “grossly excessive,” allegeattorneys for the one named plaintiff, a current Checksmartemployee.

|

|

“The investment options made available to the plan’sparticipants have been focused upon expensive and unsuitablyactively-managed mutual funds without an adequate or appropriatenumber of passively managed and less expensive mutual fundinvestment options,” the complaint says.

|

Attorneys for the plaintiff claim actively managed funds “rarelyadd value” to retirement savings plans. The five John Hancocklifestyle funds carried expense ratios between 94 and 111 basispoints. The average weighted expense ratio for all of the assets inthe plan was 104 basis points, which the complaint says is“astronomical.”

|

According to recent data from the Investment Company Institute,of all 401(k) assets that were invested in equity funds in 2015, 88percent of the assets were invested in funds with expense ratiosless than 100 basis points; 45 percent of assets in equity fundswere invested in funds with expense ratios less than 50 basispoints.

|

The complaint says there are “virtually no Vanguard index funds”offered in the plan. Data from the plans 2014 Form 5500 filinglists two Vanguard funds among the offerings.

|

One John Hancock Standard and Poor’s 500 index fund was offered,which held about $400,000 of participant assets in 2014. But eventhat fund was too expensive, alleges the suit. At 60 basis points,the expense ratio on the John Hancock index fund was nearly fourtimes the cost on Vanguard’s equivalent fund.

|

In 2014, the five John Hancock actively managed Lifestyle fundsaccounted for roughly $18 million of the $25 million in planassets.

|

The complaint says three of those funds “materiallyunderperformed” S&P 500 index total returns.

|

The Lifestyle Growth Active Strategy fund had a one-year returnof about 8 percent, compared to the nearly 13 percent return withthe S&P 500 total return.

|

|

But over 10 years, that margin narrows: the Lifestyle Growthfund returned about just over 7 percent, compared to 8.3 percent inthe S&P index.

|

For the past 10 years, returns on the John Hancock LifestyleGrowth Fund, which allocates about 20 percent of assets tounderlying fixed-income funds, posted returns on par with itsMorningstar peer group, according to information from the fund’sprospectus.

|

Over the past six years, the allegedly costly investmentofferings, and their “dismal” performance, amount to fiduciarybreaches in the failure to ensure reasonably priced investmentofferings, and in failing to prudently monitor the investments, asevidenced by retaining the options, alleges the claim.

|

At no point in the complaint do plaintiff’s attorneys addresseducation, communication, or other potential features of a 401(k)plan, nor do they address how the costs of administering the planare paid.

|

In 2014, fees and commissions to John Hancock were $79,396,according to Form 5500 data on Brightscope. Fees to Cetera were$34,645. A third-party administrator, Sheakly PensionAdministration, was paid $44,751.

|

Brightscope gives the Checksmart 401(k) plan a rating of 56,below the average rating of 62 for the firm’s peer group.Brightscope classified the total plan fees as high, the plan’sparticipation rate as below average, and the average accountbalance as poor.

Complete your profile to continue reading and get FREE access to BenefitsPRO, part of your ALM digital membership.

  • Critical BenefitsPRO information including cutting edge post-reform success strategies, access to educational webcasts and videos, resources from industry leaders, and informative Newsletters.
  • Exclusive discounts on ALM, BenefitsPRO magazine and BenefitsPRO.com events
  • Access to other award-winning ALM websites including ThinkAdvisor.com and Law.com
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.