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Oct. 14 — A lawsuit accusing Deutsche Bank of stuffing its 401(k) plan with high-fee, in-house funds is moving forward after a federal judge largely denied the banking giant’s motion to dismiss ( Moreno v. Deutsche Bank Ams. Holding Corp. , 2016 BL 342731, S.D.N.Y., No. 1:15-cv-09936-LGS, 10/13/16 ).
The suit, filed on behalf of a proposed class of about 20,000 employees, claims Deutsche Bank directed more than $300 million of its workers’ retirement savings toward an in-house index fund that carried fees 11 times higher than a comparable fund offered by Vanguard, with those fees going “directly into Deutsche Bank’s pocket.” In allowing most of the workers’ claims to proceed, the New York-based judge said on Oct. 13 that the workers plausibly alleged that the bank’s process for choosing plan investments was “tainted by failure of effort, or competence, or loyalty.”
In the past year, many proposed class actions have targeted financial companies that include in-house investment products in their 401(k) plans. The workers bringing these suits have seen success in many instances, with courts refusing to dismiss cases against BB&T Corp., Putnam Investments LLC and Allianz Asset Management of America. Similar lawsuits are pending against American Century Services LLC, New York Life Insurance Co., Neuberger Berman Group LLC and Morgan Stanley.
In this case, the judge found that the Deutsche Bank workers stated a valid claim for fiduciary breach under the Employee Retirement Income Security Act by alleging that the company’s in-house funds carried fees much higher than competitor funds and that those fees directly benefited the company at the expense of its workers.
The workers also advanced prohibited transaction claims based on the 401(k) plan’s investment in proprietary investment funds. Deutsche Bank claimed that it satisfied statutory exemptions from ERISA’s prohibited transaction rules, but the judge disagreed, saying that the Deutsche Bank employees may have been paying higher fees for the proprietary funds than those paid by the bank’s institutional clients.
Deutsche Bank also argued that the claims against it were untimely, citing two separate ERISA provisions placing three- and six-year limitations on certain lawsuits. The judge found neither argument persuasive.
Despite allowing the bulk of the suit to move forward, the judge dismissed certain defendants after finding that they weren’t fiduciaries under ERISA and thus couldn’t be liable for fiduciary breach. The judge specifically noted this determination rested on existing Department of Labor rules, and not the amended fiduciary definition scheduled to go into effect in April 2017.
Judge Lorna G. Schofield of the U .S. District Court for the Southern District of New York wrote the opinion.
Deutsche Bank is represented by Goodwin Procter LLP and Holland & Knight LLP. The employees are represented by Nichols Kaster PLLP.
Nichols Kaster has been the driving force behind this flurry of litigation over proprietary mutual funds. It represents the employees suing New York Life, Putnam, Allianz, American Century and BB&T Corp.
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Text of the decision is at http://www.bloomberglaw.com/public/document/RAMON_MORENO_et_al_Plaintiffs_against_DEUTSCHE_BANK_AMERICAS_HOLD.
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
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