A new class-action lawsuit that hopes to include thousands of 401(k) plans in its claim alleges that Empower Retirement earned "disproportionate profits" from revenue-sharing agreements.
The lone named plaintiff is a participant in TPS Parking Management's 401(k) plan.
But the claim proposes that the class of plaintiffs include participants in "all employee pension benefit plans" to which Empower provides a group annuity contract or group funding agreement.
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Plaintiffs' attorneys attempt to establish Empower as a fiduciary under the Employee Retirement Income Security Act, based on its discretion in administering plan assets and for the investment advice it gives managing participants' assets, according to the complaint, which was brought in U.S. District Court for the District of Colorado.
Because the service provider is a fiduciary, the revenue-sharing agreements it negotiated with non-propriety mutual funds amount to prohibited transactions under ERISA, the claim alleges.
In establishing revenue-sharing contracts, Empower engaged in self-dealing, effectively putting its profit motives ahead of participants' interests, thereby breaching its fiduciary obligation, the claim also alleges.
The complaint does not put a specific dollar amount on damages, but alleges Empower "lined its pockets with at least tens of millions of dollars in revenue sharing payments by and through self-dealing, other prohibited transactions and breaches of its fiduciary duties."
Participants received no value from the revenue-sharing agreements that benefited Empower, alleges the proposed class.
"Empower Retirement's primary criterion for inclusion of a mutual fund on its menu of funds, as well as the selection of advisors to manage proprietary mutual funds, including so-called sub-advised funds, however, is the amount of revenue sharing payments or other compensation that the mutual fund is willing to pay Empower Retirement," the claim says.
In a statement to Bloomberg, an Empower representative said the claim is without merit, and that the company intends to mount a vigorous defense.
The TPS Parking Management 401(k) Plan has over 900 active participants and more than $6.5 million in plan assets, according to BrightScope.
Ary Rosenbaum, an ERISA attorney and consultant to plan sponsors, expects the case will get "tossed," according to a blog post.
The plaintiff's claims rely on proving that Empower, in acting as the plan's service provider, was indeed a fiduciary under ERISA, says Rosenbaum.
"While I don't care for revenue sharing as it inadvertently exposes plan sponsors to liability, I think it's going to be hard to treat Great West (Empower) as a fiduciary unless they did something overt to make them a fiduciary," he wrote.
Recently, the 8th Circuit Court of Appeals upheld a lower-court ruling that dismissed an excessive fee claim against The Principal Financial Group, on the grounds that it was not a fiduciary in its capacity as service provider to a 401(k) plan sponsored by McCaffree Financial Corp.
Claims against John Hancock and American United Life have also been dismissed on similar grounds.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
