MFS Worker Can Pursue Some Claims Challenging 401(k) Management (1)

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By Patrick Dorrian

Massachusetts Financial Services Co. must continue to face some allegations by a former employee that it filled its workers’ 401(k) plans with expensive, proprietary mutual funds and otherwise breached its plan management duties.

The mismanagement and self-dealing caused workers who participated in MFS’ employer- and separate employee-funded plans to pay plan fees more than 90 percent higher than those of similarly sized retirement plans and to sustain other losses, Melissa Velazquez alleged in a July 2017 proposed class action.

Together, the two plans held more than $515 million in assets as of 2012 and paid plan fees totaling 0.86 percent of that amount, or $4,416,791, Judge Rya W. Zobel of the U.S. District Court for the District of Massachusetts said. The median rate of management and related fees for similarly sized plans in 2012 was 0.45 percent, he said.

The federal law governing employee retirement plans requires plan managers to act solely in the interests of plan participants and beneficiaries, the court noted.

The decision is the latest signal to 401k plan managers that this sort of self-dealing doesn’t fly under the Employee Retirement Income Security Act, class counsel told Bloomberg Law July 20.

“We’re obviously pleased with the decision, and pleased that the court allowed the case to go forward,” Kai H. Richter said. “This decision is just the latest in a long line of decisions allowing similar claims to go forward.”

The ruling “should put 401k plan fiduciaries on further notice that utilizing proprietary funds in 401k plans without giving appropriate consideration to alternative investment options exposes them and plan sponsors to potential legal liability,” said Richter, a partner with Nichols Kaster PLLP in Minneapolis.

A spokesman told Bloomberg Law July 20 that MFS declined to comment on the ruling because the case is still “an ongoing legal matter.”

Some Claims Dismissed

Velazquez can go forward with her claim that MFS breached that duty by not being sufficiently cost-conscious, Zobel ruled July 19. MFS also was unable to convince Zobel to dismiss Velazquez’s claim that the company failed to adequately monitor the managers of the two plans. Such a claim “is derivative of the underlying breach,” and her lawsuit includes enough details to suggest such a claim may be viable, the judge said.

The court also rejected MFS’ argument that there was nothing wrong with its investment of assets of the plans into affiliated mutual funds. Although such investments generally are seen as breaching a plan fiduciary’s duty of loyalty, MFS argued that its actions fell under a specific exemption to the general rule.

But Velazquez’s assertion that the MFS plans didn’t offer participants the separate account options and less-expensive share classes that are widely available to investors is enough to show why that exemption might not apply here, Zobel said.

MFS fared better on Velazquez’s two other claims, getting both dropped from the case. Her allegation that the mutual fund fees paid to MFS as manager of the plans violated a provision of the law prohibiting self-interested transactions failed to state a valid legal claim because she over-read the meaning of “plan assets,” the court said. Those fees are paid out of fund assets, not plan assets, according to MFS.

Velazquez’s claim seeking to recover any assets of the two plans that MFS may have transferred to its affiliated companies likewise was too broad, the court said.

Carl F. Engstrom and Mark E. Thomson of Nichols Kaster and Jason M. Leviton of Block & Leviton LLP in Boston also represent Velazquez and the proposed class. Matthew L. Riffee and Michael K. Isenman in Washington and Alison V. Douglass, James O. Fleckner, and Katherine G. McKenney in Boston, all of Goodwin Procter LLP, represent MFS and related entities.

The case is Velazquez v. Mass. Fin. Servs. Co., 2018 BL 256663, D. Mass., No. 17-11249, motion to dismiss denied in part 7/19/18.

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