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Neuberger Berman the Latest Sued Over In-House Funds in 401(k)

A former Neuberger Berman employee is the lead plaintiff on a class-action lawsuit against the asset manager, alleging the firm cost all employees $130 million in retirement savings by putting a proprietary, actively managed investment fund with high fees and low performance as an option inside its corporate 401(k) plan. Plaintiff Arthur Bekker claims that by including its own funds—the Neuberger Value Equity Fund, in particular—in the plan, the firm breached its fiduciary duty.

“ERISA requires that the fiduciaries to the plan—which is basically the employer and in this case the investment committee which selects the investments—operates the plan solely in the interests of participants and beneficiaries; in doing so, they avoid self-dealing,” said Mark Boyko, an attorney at Bailey & Glasser in St. Louis, the firm representing the plaintiff. “Here we have a fund that has high fees and a track record of underperforming its index and underperforming its benchmark, and yet it has not been removed from the plan.”

This is just the latest in a growing trend of lawsuits being brought against financial services firms for self-dealing in their 401(k) plans. Employees sued Franklin Resources this week over its use of in-house mutual funds in its 401(k); the plaintiffs in that case are also represented by Bailey & Glasser. Similar cases involving in-house investment options of a financial services company’s retirement plan have been filed in the last year against American Century Investments, Allianz, New York Life Investment Management, Putnam, Deutsche Bank, M&T Bank and BB&T Bank.

Bekker claims that the Value Equity Fund, which accounted for about half of the plan’s assets, was 40 times more expensive than a comparable fund, the Vanguard Institutional Index Fund, a passive fund that tracks the S&P 500 Index. The Vanguard fund charges 2 basis points, compared to 80 basis points for the Neuberger fund.

That resulted in fees of at least $20 million going to Neuberger over the past five years, while the Vanguard fund would have charged just under $500,000 over that time period, the complaint says.

“The complaint compares fees on our active fund with a passive index option that is also included in our plan,” said Alexander Samuelson, a spokesman for Neuberger Berman. “We offer participants many options—active and passive, in-house and competitor—each at an appropriate fee level. The implied argument in the complaint that active and passive fees should be identical is nonsensical.”

Of the 29 investment options in Neuberger Berman’s plan, eight are proprietary. Employees have discretion to choose the funds they want to use, and the choices include both active and passive funds. If participants don’t choose their funds, they default to a passive target-date fund run by BlackRock.

The suit also points to the fund’s underperformance. The fund returned nearly 3 percent annually for the 10 years ending June 30; the complaint compares that to the S&P 500 and the Vanguard fund, which gained 7.4 percent over that period.

Duane Thompson, senior policy analyst at fi360 in Pittsburgh, said many of these cases seem to be turning into an active versus passive debate.

“It’s almost devolving into a question of whether actively managed funds are imprudent in 401(k) plans,” he said. “In the past, there’s nothing in ERISA that prohibits any kind of investments so long as it’s not imprudent and the expenses are reasonable. The Department of Labor and ERISA doesn’t single out actively managed funds and say they’re, per se, imprudent, so the devil is in the details.”

In April, BB&T and Putnam argued for summary judgment to dismiss the lawsuits against them, but the courts declined. Thompson said that could signal a prolonged process for similar cases.

“I think we’re still in the early stages of trying to see what this all involves because even though you have similar claims, a lot of it is going to get into the nitty gritty,” Thompson said.

“Who made the investment decisions, for example? Did the investment committee minutes—if they’re included in discovery—did they show any contradictions between what their intent was and what the due diligence process was? Was there a sufficient due diligence process? Did these firms have investment policy statements for guidance? And did they adhere to those guidelines in the IPS when selecting some of the funds that have been singled out as imprudent?”

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