Call it a lesson in the difference between 3(38), 3(21) and 3(16) fiduciary services when dealing with 401k plans.
A judge has ruled that Prudential Retirement Insurance & Annuity Co. was not operating a “pay-to-play” scheme in the 401k plans it services. The court found Prudential “didn’t qualify as a fiduciary under the Employee Retirement Income Security Act for purposes of the claims raised against it in two combined lawsuits,” according to Bloomberg BNA.
The reason was that Prudential did not have “unilateral authority to set its own compensation or to add or delete funds from the plans’ investment menus.”
The two lawsuits against Prudential were brought by participants in 401k plans for Virginia-based plumbing wholesaler Ferguson Enterprises Inc. against the company and its investment advisor, CapFinancial Partners LLC.
“According to the judge, the Ferguson plan’s investment menu offered 14 mutual funds, including three passively managed funds, with expense ratios ranging from 0.04 percent to 1.02 percent,” Bloomberg notes. “This menu was reasonable and undermined the allegations of excessive fees, the judge concluded. In dismissing all claims, the judge noted that the lawsuits were part of a series of cases aimed at moving the entire 401k industry away from certain compensation structures that are frequently challenged in court.”
The judge said that while the lawsuits “seek to transform the market itself,” ERISA protects investors’ “reasonable expectations in the context of the market that exists,” according to the news service.
In addition to clearing Prudential of fiduciary responsibility for its fees and investment menus, the judge also considered the company’s GoalMaker program, which assists individual investors in choosing their asset allocation. Plaintiffs alleged GoalMaker directed investors toward higher-fee funds that earned more compensation for Prudential, with which the judge disagreed.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
