American Century Wins 401(k) Class Action Lawsuit

Judge rules that offering employees only proprietary funds does not violate ERISA.

Asset manager American Century Investments has won a class action lawsuit that had accused the firm of violating its ERISA duties by profiting from its 401(k) plan at the expense of its employees by only offering its own mutual funds in the plan.

In its complaint against American Century, the plaintiffs, who were participants in the company’s 401(k) plan, accused the firm of using the plan “as an opportunity to promote American Century’s mutual fund business and maximize profits at the expense of the plan and its participants.”

It said that the firm loaded the plan exclusively with its own investment offerings, without investigating whether the participants would be better served by investments managed by unaffiliated companies.

“The retention of these proprietary mutual funds has cost plan participants millions of dollars in excess fees,” said the complaint.

However, a US district court judge ruled that the plaintiffs failed to prove American Century breached any fiduciary duty to  participants.

“Plaintiffs repeatedly emphasize that defendants only considered American Century funds in the plan, which they argue evidences a motivation to benefit American Century,” said Judge Greg Kays in his decision. “But it is not disloyal as a matter of law to offer only proprietary funds. In fact, it is common for financial service companies to offer their own investment funds in their retirement plans. And there is no duty to offer more than one investment company’s funds.”

Although the plan consisted of only American Century funds, the court found that it contained a diverse array of asset classes and investment styles covering the entire risk/reward spectrum. For example, the plan offered funds from money market accounts, several specialty funds and common stock funds, as well as a significant number of large cap equity funds, and many small- and mid-cap equity funds as well, the court said.

‘The ruling is a complete vindication of American Century Investments, as well our colleagues who make up the retirement committee overseeing our company retirement plan,” Chris Doyle, spokesman for American Century Investments, said in an email to CIO. “The judge’s well-reasoned ruling found that American Century and the members of that retirement committee acted in the best interests of plan participants and followed a prudent oversight process.”

The plaintiffs argued that the American Century Retirement Plan Retirement Committee, which administers the company’s 401(k) plan operated under a conflict of interest because members served as both employees of American Century and as plan fiduciaries.

But ERISA does not prohibit an employer’s corporate officer or employee from serving as a plan fiduciary,” wrote Kays in his ruling. “It merely requires the officer wear the fiduciary hat when making fiduciary decisions.”

Doyle said the ruling was not just a victory for American Century, but that “it’s good for the industry and ultimately plan participants because it will help liberate investment committees to make investment selections based on participants’ best interests instead of single factors like fees or litigation concerns.”

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