Investor in Funds of Funds Loses Appeal Over Excessive Fees

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By Antoinette Gartrell

A retirement plan that invested in six “funds of funds” can’t sue their investment adviser for allegedly excessive management fees it received from the underlying funds, a federal appeals court affirmed ( Am. Chem. & Equip. Inc. 401(k) Ret. Plan v. Principal Mgmt. Corp. , 8th Cir., Nos. 16-1576, 16-1580, 16-1712, 7/24/17 ).

The retirement plan doesn’t have standing to sue the adviser under 1940 Investment Company Act Section 36(b) for breaching its fiduciary duty to the six funds, Judge James B. Loken of the U.S. Court of Appeals for the Eighth Circuit said July 24. He said the fees were paid by the underlying funds, which are separate investment companies—not by the funds in which the retirement plan was a shareholder.

Funds of funds invest in a portfolio of other mutual funds. They were designed to afford greater diversification than traditional mutual funds, but with typically higher management fees because such fees include part of the expense fees charged by the underlying funds.

Mutual Fund Investment

American Chemicals & Equipment 401 (K) Retirement Plan invested in six LifeTime Funds, each of which invested in a portfolio of other mutual funds designed to maximize performance for investors targeting a specific retirement date.

ACE sued the LifeTime Funds’ investment adviser—Principal Management Corp.— alleging that it breached its fiduciary duty to the funds and sought to recover “unfair and excessive fees.” ACE based its claim on the adviser fees paid to PMC by the funds in which the LifeTime Funds invested, which indirectly reduced the LifeTime Funds’ net asset value.

The district court sided with PMC saying that ACE lacked standing to challenge the fees in question because they were “at a level once removed from [ACE’s] security interest.”

Affirming, the appeals court said the mere reduction of an asset’s value doesn’t mean that the reduction was paid by the asset’s investors. In this case, the fund fees at issue were paid by the underlying funds, not by the LifeTime Funds in which ACE was a shareholder, the court said. Section 36(b) is limited to claims regarding payments made by the LifeTime Funds or its shareholders, the court said.

To contact the reporter on this story: Antoinette Gartrell in Washington at agartrell@bna.com

To contact the editor responsible for this story: Phyllis Diamond at pdiamond@bna.com

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