Taking advantage of a stranger is bad enough, but what happens when a large financial firm knowingly takes advantage of its own employees?

And to make matters worse, what happens when the employees are disadvantaged by their own employers in their own 401(k) plans?

You would think this is a rare event, but unfortunately it happens more often than people think. And when it happens, it is also a great indicator that if a financial firm is taking advantage of their own workers than they are certainly doing it to their other non-employee customers, as well.

Take the case of Edward Jones.  In a March 27, 2018 decision, U.S. District Judge John A. Ross refused for a second time to dismiss a lawsuit charging that Jones violated ERISA, the pension protection statute, when it administered the company’s own 401(k) plan that charged participants more for services than they should have been charged.

In the case, it is alleged that Jones victimized its own 401(k) plan participants “to benefit Edward Jones and its corporate partners, rather than in the interests of participants and beneficiaries.” Investment options available within the plan included three managed by Edward Jones and over 40 managed by “Partners” or “Preferred Product Partners,” according to the article in the 401k Specialist (March 30, 2018.)

How much did this cost Jones 401(k) participants? The suit charges that Jones paid “excessive fees to the tune of tens of millions of dollars were paid to the plan’s record keeper (Mercer HR Services, Inc.) despite the availability of nearly identical, lower-cost options.”

When a lower-cost service or investment product is available and the plan sponsor knowingly avoids using the lower cost and equal quality alternative, the plan sponsor violates their fiduciary obligations.

But with over seven million clients and more than $1 trillion in assets, Edward Jones certainly knows ERISA law. But sweetheart deals are common in any industry, and Jones certainly knew what it was doing and had a reason to not comply, but they probably will never explain it in open court.

The Case of Principal Financial 

While Jones is the latest to make the news, other major investment firms have also violated their fiduciary duties by offering higher-prices, under-performing mutual funds to their own employees.

Principal Financial, the largest employer in Iowa and a firm that holds itself out as a trusted advisor to individual investors, was involved in a lawsuit that said ERISA violations spanned from 2008 through 2015 and involved violated ERISA “by failing to comply with their responsibilities under ERISA to the Plans and participants of the Plans in the management of the Plans.”

In the case of Krystal M. Anderson and All Others vs. Principal Life Insurance Company, a lawsuit filed in the United States District Court for the Southern District of Iowa (Civil Action No. 4:15-cv-00119-JAJ-HCA), a settlement was reached in a little over two months for a case that involved serious fiduciary violations about selling proprietary funds to employees in company benefit plans that were both too expensive and underperforming.

The case, filed on 04/17/2015, and settled on 06/30/2015, was “most likely the shortest court case ever filed against Principal,” according to Dennis Myhre.  And while this settlement admittedly is old news, it still contains a powerful message:

“For good reason: Principal could not afford to have the case endure scrutiny; the fewer of their clients that knew about it, the better.  A key element in this case is that the class of plaintiffs filing this case is all employed by Principal Financial Services, with insider information, and involved the Principal Select Savings Plan for Employees or the Principal Select Savings Plan for Individual Field.”

“The Plaintiff claimed that the Defendants (Principal) acted improperly by selecting and maintaining proprietary Principal Life investment options in the Plans and charging excessive fees, paid to Principal Life, for the Plans’ administrative services. As a result, Plaintiff claims, participants of the Plans paid higher fees and obtained less return on their investment.”

As a former employee of Principal, and one who wrote about these proprietary funds for marketing purposes, many of us knew Principal’s funds were chronic underperformers and that the choice of funds in Principal’s 401(k) plans were limited simply because they were managed by their in-house stable of fund managers.

These funds were widely sold to 401(k) plans that were subject to Principal’s recordkeeping services.  To add extra revenues, Principal bundled up their own lackluster funds into the menu of choices offered to unsuspecting plan participants.  All too often, 401(k) plan sponsors,  aka the company that was offering the 401(k) plan, looked the other way or failed in their oversight capacity to their own employees. In any case, the victims here were the workers who naively thought their employer and investment manager were looking out for their best interests.

There are many more similar cases, but the moral is that employees in a 401(k) should double-check all claims made by the plan’s administration. When there is a lot of money at stake, and the stream of revenues can be hidden in many ways, suspect the worse until proven otherwise.  That is also called employee risk management.