T. Rowe Price Accused of Self-Dealing With 401(k) Plan

Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...

By Carmen Castro-Pagan

T. Rowe Price Group Inc. is accused of profiting at the expense of its employees’ retirement savings by offering, almost exclusively, in-house mutual funds in the company’s $1.7 billion 401(k) plan ( Feinberg v. T. Rowe Price Group Inc. , D. Md., No. 1:17-cv-00427, complaint filed 2/14/17 ).

T. Rowe Price offered between 80 and 95 investment funds to participants each year—all in-house funds, according to a lawsuit filed Feb. 14 in federal court in Maryland. These funds were expensive compared not only to funds offered by other investment companies, including Vanguard Investments, but also compared to other funds offered by T. Rowe Price to its commercial customers, the lawsuit said.

“We believe the suit is without merit and intend to defend vigorously,” a T. Rowe Price spokesman told Bloomberg BNA Feb. 15 via e-mail.

With the lawsuit, which seeks class treatment for 8,200 participants, T. Rowe Price joins a growing list of financial companies that face accusations of causing millions of dollars in losses to their workers, in violation of the Employee Retirement Income Security Act, by filling their retirement plans with in-house mutual funds.

Lawsuits are pending against more than a dozen financial institutions, including JPMorgan Chase Bank, BB&T Corp., Allianz Asset Management of America, Putnam Investments LLC, Deutsche Bank, Franklin Templeton, Morgan Stanley, Wells Fargo & Co., Edward D. Jones & Co., American Century Services LLC, New York Life Insurance Co., Neuberger Berman Group LLC and Charles Schwab Corp.

High-Cost Funds

At issue in the latest lawsuit is the alleged millions of dollars in fees for investment advice participants paid to T. Rowe Price affiliates. Investment advice services and the fees generated by them “are the company’s cash cow, accounting for more than 85 percent of its annual revenue during 2015,” according to information about the company on the Bloomberg Terminal.

Participants allegedly paid T. Rowe Price affiliates in excess of $50 million in fees for investment advice.

Prior to 2012, the funds offered through the company’s 401(k) plan were almost all retail-class shares of mutual funds, which are the most expensive type of investment funds offered in retirement plans, the lawsuit alleged. In 2012 and 2014, T. Rowe Price started offering less costly funds, including collective investment trusts and institutional-class shares of mutual funds, the complaint said.

However, there were comparable lower-cost alternatives for all the funds offered through the plan, the lawsuit said. A table included in the lawsuit shows that some T. Rowe Price funds had very expensive ratios compared to those offered by Vanguard.

If alternative comparable funds had been used in the plan, rather than in-house funds, participants would have paid over $27 million less in fees, the complaint said. And, if such less expensive funds had been used to replace the T. Rowe Price funds in areas where the company was weak, participants would have earned at least $123 million more for their retirement, the lawsuit said.

The lawsuit also named as defendants a number of T. Rowe Price affiliates and executives, including its chairman Brian C. Rogers, who this week joined the Harvard University endowment board to oversee the university’s $35.7 billion fund.

McTigue Law LLP and Cohen Milstein Sellers & Toll PLLC represent the participants.

To contact the reporter on this story: Carmen Castro-Pagan in Washington at ccastro-pagan@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

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