Neuberger Berman Hit With 401(k) Suit
August 05 2016 - 12:50PM
Dow Jones News
Neuberger Berman Group LLC was sued this week for alleged
self-dealing in putting its own investment products in its 401(k)
plan, making the money manager the latest financial-services firm
to be targeted in a wave of similar litigation challenging the use
of namesake funds.
The suit, filed by former Neuberger employee Arthur Bekker,
singles out the Neuberger Berman Value Equity fund, which it says
is "larded with high fees and has suffered from consistently
abysmal performance."
The fund as of Dec. 31, 2014, held about half the plan's $831
million in assets. For the five years ended June 30, it posted an
average annual return of 4.7%, versus 12.1% for its benchmark, the
S&P 500 Index. The complaint says plan participants would have
had more than $130 million more had they instead been in an index
fund that roughly matched the market.
The suit also takes issue with the fund's fees. At 0.8%, they
are far higher than the 0.02% expense ratio on Vanguard Group's
Vanguard Institutional Index fund Institutional Plus shares, which
also track the S&P 500. Because of this fee gap, the suit
alleges, "Neuberger received at least $20 million" more than
employees would have paid to Vanguard from 2010 to 2015.
The complaint challenges the plan's "decision to continue to
offer the fund" despite "its high fees and persistent and
increasing underperformance compared to readily available
alternatives." It also alleges that "instead of acting for the
exclusive benefit of the plan and its participants and
beneficiaries," the defendants "acted for the benefit of Neuberger"
in selecting the fund for the 401(k) plan.
Neuberger Berman spokesman Alexander Samuelson says the company
looks "forward to fighting the allegations on the merits." He
pointed out that independent 401(k) ratings firm BrightScope Inc.
gives Neuberger's 401(k) plan high marks – a score of 90 out of
100, placing it in the top 15% of plans in its peer group.
"The implied argument in the complaint that active and passive
fees should be identical is nonsensical," he said.
The suit comes on the heels of similar litigation filed in
recent weeks against companies including Franklin Resources Inc.,
which operates Franklin Templeton Investments; New York Life
Insurance Co., and American Century Investments, all of which
include their own investments in their 401(k) plan menus.
Over the past year, employees have filed suits against nearly a
dozen financial-services companies for putting proprietary
investments in their 401(k) plans, says Duane Thompson, senior
policy analyst at fi360, a Pittsburgh company that provides
fiduciary training to advisers to 401(k) plans.
Fueling the litigation, experts say, are a handful of recent
multimillion-dollar settlements of 401(k) fee cases by companies,
including Boeing Co. and Lockheed Martin Corp., as well as the
Supreme Court's 2015 decision in Tibble v. Edison, which put
retirement plans on notice that they have a duty to monitor plan
investments, including fees.
Companies including Fidelity Investments, Ameriprise Financial
and Transamerica Corp. recently settled suits brought by
participants in their own 401(k) plans.
Mark Boyko, an attorney for the plaintiffs in the cases against
Neuberger Berman and Franklin Resources, says financial-services
firms need to be aware that "if you are receiving fees from your
own employees' retirement savings plans, that's going to create
litigation risk."
But asset-management firms that don't offer their own products
to their own employees create a red flag for potential clients,
"who are going to ask, why they aren't using their own funds," says
an attorney whose firm is involved in some of the cases.
In the latest suit, Neuberger's Mr. Samuelson says the firm's
401(k) plan offers its employees more than two dozen investment
options, two-thirds of which are managed by firms other than
Neuberger. They include BlackRock Inc.'s LifePath Index funds,
target-date funds that are the default investment for Neuberger
employees who automatically are enrolled in the company's 401(k)
plan. The company contributes 15% of pay to the 401(k) for all
eligible employees, regardless of the employees' contributions, and
it covers the plan's administrative costs, he says. In contrast,
the typical company matches about 3% of pay.
The suit, which seeks class action certification on behalf of
other Neuberger employees, also names Value Equity fund manager
Marvin Schwartz as a defendant.
"Marvin Schwartz over the course of his career has created
tremendous performance for his clients. Plan participants who
invest with him show their continued confidence," Mr. Samuelson
says.
The suit seeks "disgorgement of unlawful fees, expense and
profits taken by defendants."
Write to Anne Tergesen at anne.tergesen@wsj.com
(END) Dow Jones Newswires
August 05, 2016 12:35 ET (16:35 GMT)
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