Edward Jones mismanaged its 401(k) plan and charged participants excessive fees, according to a lawsuit that joins a recent barrage of employee retirement plan-related legal actions against leading financial services firms.

The latest lawsuit was filed in U.S. District Court in Missouri on behalf of Charlene F. McDonald, an on-call branch office administrator who works with advisers, and a class of "similar participants." The case alleges breach of fiduciary duty and transactions prohibited under the Employee Retirement Income Security Act of 1974.

“The lawsuit's allegations that Edward Jones, its affiliates and plan fiduciaries violated their fiduciary duties or engaged in prohibited transactions related to plan assets are not true,” Edward Jones spokesman John Boul says.

Many of the allegations have a familiar ring by now after the recent string of similar cases, including one against Morgan Stanley. They include charges that Edward Jones populated its retirement plan with investment options offered by its business associates. In exchange, the firm received millions of dollars in so-called “revenue sharing” payments, according to the lawsuit.

“Approximately 80% of plan assets were invested in mutual funds offered by partners or preferred partners of Edward Jones,” the complaint states. “And approximately 80% of funds offered in the plan in 2014 came from partners or preferred partners.”

“The lawsuit's allegations that Edward Jones, its affiliates and plan fiduciaries violated their fiduciary duties or engaged in prohibited transactions related to plan assets are not true,” Edward Jones spokesman John Boul says.

UNREASONABLE FEES

The suit also claims that unjustified fees were paid to the plan’s record keeper, Mercer HR Services. These are said to have increased by 314% between 2010 and 2014, even though market rates for recordkeeping services declined and the number of plan participants only increased by 22% during that same period. Had Edward Jones “ensured that participants were only charged reasonable fees for administrative and recordkeeping services, Plan participants would not have lost well over $8 million in their retirement savings through unreasonable recordkeeping fees,” the complaint alleges.

Other allegations include charges that the plan offered high-cost mutual funds when lower-cost alternatives were available for identical investment vehicles, resulting in $13 million in excessive fees. Until 2013, the complaint asserts, Edward Jones only offered plan participants actively managed mutual funds and did not include lower-cost index funds as an investment option. It also alleges that the plan’s fiduciaries failed to offer a stable value fund as a cash-preservation option, selecting a money market fund instead. This lost participants “over 12% of their buying power,” the complaint maintains.

Mark Boyko, associate attorney at Bailey Glasser, the law firm that filed the complaint, believes the plaintiff has a strong case. “We have multiple claims in the influence and selection of the investment options,” he says. Compared with other similar retirement plan-related lawsuits that have been filed recently, the Edward Jones case “has some uniqueness due to the preferred partner aspect that the company had with some of these relationships.”

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“Approximately 80% of plan assets were invested in mutual funds offered by partners or preferred partners of Edward Jones,” according to the complaint against the firm.

Responding to the charges, Boul stated that “the Edward Jones Profit Sharing and 401(k) plan is prudently managed to provide retirement savings to the more than 38,000 associates who participate in it,” and that “the lawsuit's allegations that Edward Jones, its affiliates and plan fiduciaries violated their fiduciary duties or engaged in prohibited transactions related to plan assets are not true.”

He described as “patently false” the allegation that the firm profits from the plan's investments through revenue sharing agreements with its business partners. As of year-end 2014, the 401(k) plan had nearly $4 billion in assets.

(Bloomberg News)
A complaint filed in federal court in New York charges that Morgan Stanley chose inappropriate and high-priced investments so that it could profit at the expense of its staffers.

In the case filed in federal court in New York against Morgan Stanley, the wirehouse is accused of mismanaging the firm’s 401(k) retirement plan and costing 60,000 employees hundreds of millions of dollars. The complaint charges that the investment firm chose inappropriate and high-priced investments so that it could profit at the expense of its staffers.

A Morgan spokeswoman declined to comment on the claims.

Since June, a number of other financial services companies, including Neuberger Berman, Franklin Templeton, the New York Life Insurance Company and American Century Investments, have faced similar legal actions. Bailey Glasser is the law firm responsible for the litigation involving Neuberger and Franklin.

Bailey Glasser’s Boyko chalks this up to coincidence. The Edward Jones suit “is a case we’ve been investigating for at least six months,” he says. “In that respect, some of the timing is coincidental. We lodged the complaint when we had enough information to file.”

But Boyko also acknowledges that there’s been a recent increase in the number of these cases, which he attributes to “heightened awareness by plan participants that employer self-interest [in retirement plans] is a problem that needs to be fixed. Obviously,” he adds, “all the headlines surrounding these cases increases awareness.”