Lawsuit Provides Cost Data About Directing 401(k) Business to Proprietary Funds


    As discussions on Capitol Hill continue about the need for broker-dealer to adopt a uniform fiduciary standard, a lawsuit may provide some answers to a Congressman’s question about the lack of hard data.

    The question about the need to supply hard numbers to prove the cost of violating suitability standards was raised by Rep. Scott Garrett, R-N.J.,

    Rep. Scott Garrett

    chairman of the House Financial Services subcommittee.  Garrett (pictured) raised the question during a hearing held the week of September 12, 2011, on financial adviser regulation.  

    Garrett said the case for adopting a fiduciary standard was hurt because there was no hard data available to show the dollar costs to investors by broker-dealers who provide compromised, non-objective financial advice.

    The question was raised in a hearing at which Barbara Roper, investor protection director for the Consumer Federation of America, testified about the need for investors to be able to make intelligent comparisons between investment products they are being sold.

    But a lawsuit filed by a group of workers at Ameriprise Financial in federal court against their employer, alleges that their own company placed their 401(k) contributions in proprietary funds, ringing up $20 million in excessive costs.  Defendants in the case include Ameriprise, as well as the firm’s employee benefits administration and 401(k) investment committees.

    The lawsuit charges that Ameriprise and its committees, as the plan’s administrators, skirted their fiduciary duty to the 401(k) plan by investing in mutual funds and target date funds from Ameriprise’s subsidiary, RiverSource Investments LLC, now known as Columbia Management Investment Advisers LLC. 

    The suit charges that between 2005 and March 2007, an average of $500 million in plan assets went annually into RiverSource and Ameriprise Trust Co., the trustee and record keeper of the plan.

    By investing in their own employer’s captive funds, the 401(k) plan generated fee revenue for RiverSource and its affiliates, as well as for Ameriprise Trust Co., the plaintiffs claim.  These in-house funds were also more expensive than other alternatives offered by the Vanguard Group, according to the lawsuit.

    Based on differences in expenses charged by the Ameriprise fund subsidiaries and Vanguard, the lawsuit said that it cost Ameriprise plan participants over $20 million related to excessive fees and expenses.

    Calculating the Difference
    This $20 million in excessive fees and expenses is based on just one 401(k) plan.  The suit also provides one answer to Rep. Garrett’s question hard data is unavailable. 

    If the same cost and expense comparison methodology is used in other 401(k) plans nationwide, the numbers could be significantly higher. While making this calculation is possible, it is also very fluid because any expense calculation would be based on assets under management, which is dependent on market volatility.

    A 2006 paper from Boston College’s Center for Retirement Research found that about 34% of retirement plans were classified as defined-401(k) plans; 23% pension and 43% IRAs. 

    As pension plans continue to be phased out in favor of 401(k) plans that carry higher expenses, the cost to participants has also increased due to the basic structure of 401(k) plans.  But again, finding that number in the academic research, if it has been done so far at all, is difficult. 

    The problem, as Rep. Garrett has noted, is that while the cost figure is not readily available, it does not mean that it does not exist.  Scientists, such as Einstein and Leibnitz, theorized that some planets had irregular orbits years before their satellite moons were actually discovered.

    Rep. Garret’s assertion that the lack of “hard factual data to show that the suitability standards have been dis-serving to those served by broker-dealers” does not prove that there is not a problem.  It only shows that the data has yet to be produced. 

    But the Ameriprise lawsuit shows that the cost of not having a fiduciary standard does produce definite dollar costs, especially if they could be extrapolated to all the nation’s 401(k) plans.

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    Chuck Epstein has managed marketing communications and public relations departments for major global financial institutions and participated in the launch of industry-changing financial products. He also has written by-lined articles for over 50 publications, five books and served as editor and publisher of nation’s first newsletter on the topic of using the PC for personal investing and trading. (“Investing Online, 1994-1999). He also is a marketing consultant, writer and speaker on topics related to investor protection and opportunities in the very dynamic cannabis industry. He has held senior-level marketing, PR and communications positions at the New York Futures Exchange, Chicago Mercantile Exchange, Lind-Waldock, Zacks Investment Research, Russell Investments and Principal Financial. He has won national awards from the Mutual Fund Education Alliance (MFEA) and his web site,, was named best small blog in 2009 by the Society of American Business Editors and Writers (SABEW).


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