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General Electric Co. is accused of filling its $28.5 billion 401(k) plan with high-cost, poorly performing in-house mutual funds, causing its employees to lose hundreds of millions of dollars in their retirement savings ( Haskins v. General Electric Co. , S.D. Cal., No. 3:17-cv-01960, complaint filed 9/26/17 ).
GE allegedly selected and retained its proprietary mutual funds in the plan, earning hundreds of millions of dollars from a subsidiary that managed the plan to the participants’ detriment, according to a lawsuit filed Sept. 26 in federal court in California. GE’s selection of its proprietary funds for the plan provided its subsidiary—GE Asset Management Inc.—a constant source of fees and helped inflate the market value of GEAM, which GE sold to State Street for $485 million in 2016.
The lawsuit follows more than two dozen similar actions pending against large employers that include their own or affiliated investment funds in their 401(k) plans. In June, American Airlines Inc. agreed to pay $22 million to settle a lawsuit raising similar allegations. In the past year, Principal Life and New York Life settled similar claims for $3 million each, and TIAA agreed to a $5 million deal. In the past, other major companies have settled similar claims, including Caterpillar Inc. ($16M) and Lockheed Martin ($62M).
The lawsuit against GE was filed by three participants who seek class treatment for approximately 250,000 current and former GE employees. According to the lawsuit, these employees “deserved better from a leading global investment firm that touts its investment acumen.”
As of December 2015, approximately 68 percent of the plan’s assets comprised GE-related investment options and nearly 56 percent of the pooled investment funds’ options available consisted of five of GE’s in-house mutual funds, according to the lawsuit. GE selected these funds not based on their merits as investment options or on the participants’ best interest, but because these products provided significant revenues and profits to the multinational company, the lawsuit said.
The participants pointed to four of GE’s proprietary funds—the International Fund, the Strategic Fund, the RSP Equity Fund, and the RSP Income Fund—alleging that their returns fell short of certain benchmarks for almost every year since at least 2011. For three of these funds, the returns were regularly below those of their T. Rowe Price, Fidelity, American Funds, and Wellington counterparts, the lawsuit said.
As to a fifth proprietary fund—the Small Cap Fund—the participants said that its fees were unreasonably expensive because GEAM hired and negotiated a fee with multiple sub-advisers to manage the fund. GE retained for itself nearly 30 percent of the annual 0.88 percent investment management fee collected on average of assets of about about $1 billion, the lawsuit alleged.
The lawsuit said that GE violated its fiduciary duties under the Employee Retirement Income Security Act and seeks to hold it liable for $700 million in losses to the plan.
“We have no comment on ongoing litigation but we intend to fully defend the case,” a GE spokesperson told Bloomberg BNA.
Sanford Heisler Sharp represents the participants.
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