Today, November 5, 2013, in employees of Massachusetts Mutual Life Insurance Company (“MassMutual”) filed an ERISA class action lawsuit against their employer alleging self-dealing and excessive fees. The Complaint in Gordon v. MassMutual, et al. was filed in the District of Massachusetts by six current and one former participant in the MassMutual Thrift Plan. The MassMutual Thrift Plan has over 14,000 participants and over $1 billion in assets. Plaintiffs allege, as an example, that the fees paid to MassMutual were more than $5 million just in 2010 alone.
Plaintiffs allege that MassMutual is a fiduciary to the plan because it served as the recordkeeper, investment manager, and primary service provider to the plan. The plan document also allegedly appoints the CEO of MassMutual as the primary fiduciary to the Plan. The CEO then appoints members to the two fiduciary committees. Plaintiffs have sued MassMutual, the current and former CEO’s, as well the investment and administrative committees and multiple committee members.
The plaintiffs allege that the fiduciaries to the plan were conflicted because of their roles as executives to MassMutual. In particular, the plaintiffs attack the CFO as well as the fact that three investment managers from the very products being offered to participants were on the fiduciary investment committee.
Plaintiffs allege that the plan has 38 investment options of which 36 to 37 are MassMutual proprietary funds. They allege this shows no prudent process was put in place when they were selected.
Plaintiffs attack the difference between what is paid to the subadvisor on a number of funds versus what they retain for monitoring that advisor. As an example, plaintiffs allege that the MassMutual S&P 500 Index pays its subadvisor .2 basis points, where as MassMutual pays itself 7.2 basis points, or 899% as much.
Plaintiffs also attach the performance of multiple funds, claiming as an example that “the Capital Appreciation Fund and the Large Cap Value Fund have a history of significant underperformance for years, underperforming their respective benchmarks and prudent investment options available to the Plan by over $10 million each in the past six years alone.”
Plaintiffs further allege that other MassMutual clients paid lower fees.
The Fixed Interest Account
Plaintiffs allege that participants who invested in the Fixed Interest Account not only paid risk charges and recordkeeping fees of 115 to 175 basis points, but that MassMutual also retained “spread” that was possibly multiples of this amount. Plaintiffs define spread as the difference between what the investments in the general account actually earn versus what is credited to the plan.
Of interesting note, the plaintiffs also attack the fact that the MassMutual CEO controls the group annuity contract that offers the Fixed Interest Account that invests in the MassMutual general account. Plaintiffs allege that the CEO has more or less rigged the contract in favor of MassMutual as the expense of participants. Specifically, plaintiffs allege that the contract states “it will be a breach of this Agreement for the Plan Sponsor to adopt any change or amendment that would have an adverse effect on MassMutual’s administrative procedures or the financial experience of MassMutual” and “it will be a breach of this Agreement for the Investor, Plan Sponsor or the Plan fiduciary to deliver any communication to Participants, either directly or indirectly, that is intended to induce Participants to withdraw or transfer funds from the Guaranteed Interest Account to another investment option under the Plan (a ‘Prohibited Communication’).”
Without a doubt, this case has strong similarities to previously filed cases against Ameriprise, Cigna, and Fidelity regarding their in house retirement plans. To note, Cigna just paid $35 million to settle the case against them.
So what does this mean for plans that use MassMutual as a provider or advisors who recommend MassMutual services and products? It means that you should use this as an opportunity to review your plan’s relationship with MassMutual. This is only a complaint and no one can predict with any certainty how it will turn out. But that being said, if any of the specific allegations found in the complaint could apply to your plan, you have now been put on notice to investigate. This can include asking for more information, re-reviewing your 408(b)(2) disclosures and agreements, or benchmarking your plan’s fees. These tasks should obviously focus on analyzing any investments in your plan and ensuring that any fees paid are reasonable and necessary.