T. Rowe Price has become the latest target in a lawsuit accusation of self-dealing. A former employee has accused the Maryland based money manager of offering expensive, retail share classes to their 401(k) participant/employees when other, less expensive share classes existed. These higher cost funds caused participants to pay over $27 million more in fees than if the comparable lower cost options had been provided.
Of course, this is only one side of the tale. However, T. Rowe now joins the ranks of Fidelity, New York Life, Edward Jones, Morgan Stanley, Franklin Templeton, MassMutual, TIAA-CREF and others as defendants in self-dealing lawsuits from their own employees! It’s only a matter of time before the remaining investment houses face a lawsuit relative to their plan’s funds and fees. The ironic, cautionary note of course is that these companies, which manage large corporate retirement plans, apparently cannot thoughtfully oversee the investments in their own plans. If they can’t properly oversee fees and share classes of their own plans, how can they confidently profess to manage the fees in their client’s plans?
Care to guess how many independent recordkeepers (like CDM or NWPS) have been sued for excessive fees on proprietary funds over the years? Trick question!
There are two lessons here. The first is that a thoughtful, qualified, independent financial advisor can go a long way in helping clients benchmark and monitor their fees. Plan sponsors (especially those not engaged in the money management business) are sure to be questioned as to the appropriateness and cost of their investment options. They need sound, credible answers. Secondly, the concurrent use of an independent record keeper is structurally more consistent with being able to offer the lowest cost/highest value investments since there is no proprietary fund requirement and no pricing advantages in offering one fund over another.
This is the quintessential value proposition of an unbundled arrangement: allowing each service provider (recordkeeper, custodian, money manager and advisor) to offer the greatest possible value at lowest possible (but still profitable) cost. According to 401(k)helpcenter.com, 85% of plans with fewer than 250 participants rely upon a bundled service provider – a breeding ground for lawsuits over share classes.