Federal law requires that most company retirement plans be managed for the sole benefits of those enrolled in the plans. But the complaint for this class action alleges that General Electric and associated entities violated the Employee Retirement Income Security Act (ERISA) with its Retirement Savings Plan by favoring underperforming GE-related funds as investments and charging excessive fees for GE’s profit.
The class for this action is all participants and beneficiaries of the plan, from 2011 through June 30, 2016.
The complaint claims that the victims in this case are the nearly a quarter of a million participants in the General Electric Retirement Savings Plan, which is a profit-sharing 401(k) plan with over $28 billion in assets. The complaint alleges that the General Electric Company (GE) and the investment management business it owned until 2016, GE Asset Management Incorporated (GEAM), are the fiduciaries for the plan during the class period, since they selected all the investment options within the plan and controlled the plan’s costs.
As of December 31, 2015, the complaint alleges, 68% of the assets of the plan were GE-related investment options. Five of the funds are at issue here: the GE Institutional International Equity Fund, GE Institutional Strategic Investment Fund, GE RSP US Equity Fund, GE RSP US Income Fund and GE Institutional Small Cap Equity Fund.
According to the complaint, the retirement plan owned from 70-90% of the assets of these funds and provided income which inflated the value of GEAM. However, the complaint alleges that GEAM did not manage the plan itself, instead charging participants a fee, paying sub-advisors less than that fee to do the work, and pocketing the difference. This resulted in real gain for GE, the complaint says, when GE sold GEAM for a reported $485 million in 2016.
Furthermore, according to the complaint, the first four of the five GE funds named were underperforming. For example, the complaint alleges that in 2010 the International Equity Fund performed worse than 90% of other international equity funds available on the market, and between 2011 and 2016 had to provide significant redemptions as investors pulled out. The complaint alleges that fiduciaries for the plan, if properly performing their duties, would have replaced these underperforming options with net redemptions with any of the hundreds of similar but more profitable funds available on the market.
The Small Cap fund, the only one that consistently outperformed its benchmark, was one of those actually managed by sub-advisors, the complaint says, enriching GEAM as the company charged higher fees to the participants than it was paying to the sub-advisors.
All of this, the complaint alleges, was contrary to the strict fiduciary responsibilities imposed by ERISA. The law says that “a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries” of the plan, acting with “the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use” in the same situations.
Therefore, the law says, “in deciding whether and to what extent to invest in a particular investment, a fiduciary must ordinarily consider only factors relating to the interests of plan participants and beneficiaries”; also, a fiduciary “has a continuing duty to monitor [plan] investments and remove imprudent ones”. The complaint alleges that GE clearly breached its duties on both counts, in acting for GE’s benefit in offering in offering participants so many of its own funds and in not replacing the funds when they conspicuously underperformed.