Waddell & Reed Sued Over In-House Funds in Its 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

Waddell & Reed Financial Inc. is the latest financial services company accused of filling its workers’ 401(k) plan with high-fee, poorly performing in-house funds, when less expensive, better performing outside options were available ( Schapker v. Waddell & Reed Financial, Inc. , D. Kan., No. 2:17-cv-02365, complaint filed 6/24/17 ).

The lawsuit, filed June 24 in federal court in Kansas, targets the proprietary Waddell & Reed Funds and Ivy Funds investment products. During the past six years, more than 97 percent of the investment options made available to the plan participants were established and managed by Waddell & Reed or its affiliates, the lawsuit alleges.

A number of these funds were essentially duplicative investments that charged more fees depending on how they were branded. As a result, the company caused the plan to pay Waddell & Reed over $7 million in excessive investment management fees, the lawsuit alleges.

Waddell & Reed is one of the oldest mutual fund managers in the country and boasts $105 billion in assets under management, according to company data on the Bloomberg Terminal.

The lawsuit is the first proposed class action by Waddell & Reed workers challenging the company’s investment options in their retirement plan under the Employee Retirement Income Security Act, according to Bloomberg Litigation Analytics.

In the past three years, more than two dozen financial companies—including JPMorgan Chase Bank, Charles Schwab Corp., and Morgan Stanley—have been targeted by proposed class actions challenging the in-house investment products in their workers’ 401(k) plans.

Last week, Putnam Investments LLC defeated a class action over similar allegations. After a seven-day bench trial, a federal judge in Massachusetts held that Putnam workers failed to identify any specific circumstance in which the company and its retirement plan put their own interests ahead of the participants.

This decision favoring Putnam is the first to be reached after trial and the second victory for a financial company, after Wells Fargo won dismissal of a similar case in May. Judges have ruled against the financial company defendants, refusing to dismiss cases against BB&T Corp., Allianz, Deutsche Bank, Franklin Resources, American Century, and Edward Jones.

Within the past month, the case against Allianz was certified as a class action, and a new lawsuit was filed against Capital Group Cos., the company that sponsors the American Funds.

The new lawsuit was filed by a current plan participant who seeks class treatment for more than 1,000 individuals. The plan has $202 million in assets.

Waddell & Reed declined to comment on the lawsuit.

Foulston Siefkin LLP represents the proposed class.

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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