Principal Global Investors Hit With Suit Over Target Date Funds

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By Carmen Castro-Pagan

Principal Global Investors Trust Co. is in the crosshairs of a lawsuit by 401(k) plan investors whose assets were allegedly invested in Principal’s target date funds, which carried expensive, underperforming investment options.

Principal Global—a subsidiary of Principal Financial Group Inc.—consistently invested all assets of its target date funds into costly and poorly performing index funds, vehicles, and share classes and failed to timely remove and replace those funds with lower cost alternatives, better performing options, according to a lawsuit filed April 16 in the U.S. District Court for the Southern District of Iowa.

Principal disagrees with the allegations in the lawsuit and will vigorously contest them, a company spokeswoman told Bloomberg Law April 17 via email.

This isn’t the first time a Principal Financial subsidiary has been sued over plan fees and in-house funds. In 2015, Principal Financial Life Insurance Co. agreed to pay $3 million to settle claims that it breached fiduciary duties by exclusively investing in proprietary products and causing its retirement plan to pay excessive fees for those investments.

A growing list of companies have been sued under the Employee Retirement Income Security Act for allowing allegedly expensive and poorly performing target date funds in their retirement plans. Target date funds aim to address retirement savings needs by investing in a single fund that accounts for an investor’s retirement date, turning more conservative as the date approaches.

In December, a federal judge in California refused to dismiss a lawsuit accusing Aon Hewitt of acting imprudently by selecting and monitoring certain investment options, including JPMorgan’s target date funds, in Safeway’s 401(k) plan. In May 2017, Wells Fargo defeated a proposed class action claiming it filled its 401(k) plan with high-fee, poorly performing target date funds affiliated with the company. A challenge over Insperity Inc.'s in-house target-date also survived a motion to dismiss and won class certification.

Principal’s Proprietary Funds

The latest lawsuit was filed by participants in two retirement plans sponsored by Starkey Laboratories Inc. and Fleetcor Technologies Inc., whose assets were invested in Principal’s target date funds. As of 2016, approximately 9,000 plans have participants invested in one or more of Principal’s funds.

The investors alleged that Principal failed to employ a prudent and loyal process for selecting, monitoring, and reviewing the underlying investments held by Principal’s target date funds. Principal retained higher-cost, poor-performing proprietary index fund options despite the availability of identical index fund options offered by unaffiliated managers, the lawsuit said. These alternatives charged fees that were five to 15 times lower than those charged by the Principal options.

The investors also alleged that Principal used more expensive versions of its affiliated underlying investments, despite the availability of identical, but lower cost, investment vehicles and share classes. This action allegedly resulted in higher investment fees for Principal and its affiliates at the expense of investors who paid higher fees and experienced worse performance, the lawsuit said.

Nichols Kaster PLLP and Newkirk Zwagerman Law Firm PLC represent the investors.

The case is Nelsen v. Principal Glob. Inv’rs Tr. Co., S.D. Iowa, No. 4:18-cv-00115-SMR-SBJ, complaint filed 4/16/18.

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