Charles Schwab Worker Sues Over In-House 401(k) Funds

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By Jacklyn Wille

Charles Schwab Corp. is the latest in a long line of financial companies to be hit with class actions challenging the in-house investment options offered in their employees’ 401(k) plans ( Severson v. Charles Schwab Corp. , N.D. Cal., No. 3:17-cv-00285-JCS, complaint filed 1/19/17 ).

Schwab “larded” its own 401(k) plan with expensive and poorly performing investment funds and services that earned fees for the company at the expense of workers’ retirement savings, according to the new lawsuit, filed Jan. 19. The lawsuit also targets the performance of Schwab’s stable value fund and claims that Schwab executives allowed the plan’s trustee to profit from the unallocated plan assets it held.

The lawsuit puts Schwab in the company of at least 10 other financial institutions currently facing class action claims over the in-house investment funds in their workers’ 401(k) plans. Many of these lawsuits have seen early success, with courts refusing to dismiss cases against BB&T Corp., Allianz Asset Management of America, Putnam Investments LLC, Deutsche Bank and Franklin Templeton. Similar challenges are pending against Morgan Stanley, Wells Fargo & Co., American Century Services LLC, New York Life Insurance Co. and Neuberger Berman Group LLC.

‘Byzantine’ Brokerage System Challenged

In addition to raising claims about mutual fund fees and performance, the lawsuit against Schwab offers an interesting twist on the typical 401(k) fee dispute. The lawsuit specifically targets Schwab’s self-directed brokerage program, which allows investors to choose from a wide array of non-Schwab funds and individual stocks.

The brokerage system’s “byzantine complexity and confusing schedule of fees alone” make it “inadvisable for all but the most sophisticated of investors,” the lawsuit alleges. The way the brokerage system facilitates investments in individual stocks serves to “magnify the risks of investing exponentially,” the lawsuit claims.

This unusual claim appears to have roots in a series of 12 proposed class actions currently challenging the retirement plans of prominent universities including Yale, Vanderbilt and Northwestern. Those cases argue that a retirement plan with too many investment options leaves investors confused and frustrates the plan’s ability to negotiate lower fees.

The lawsuit against Schwab was filed in the U.S. District Court for the Northern District of California by Schneider Wallace Cottrell Konecky Wotkyns LLP and Berger & Montague P.C.

Schwab spokeswoman Alison Wertheim told Bloomberg BNA the lawsuit was “totally without merit” and vowed to “vigorously defend” against the claims. She declined to comment further, citing an internal policy against discussing pending litigation.

To contact the reporter on this story: Jacklyn Wille in Washington at jwille@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

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