Goldman Sachs Sued Over 401(k) Plan | Chief Investment Officer

The Goldman Sachs Group is facing a lawsuit that accuses the company of breaching its fiduciary duty by filling its 401(k) plan with underperforming proprietary mutual funds.

The lawsuit, which is led by one of its 401(k) plan participants, alleges that Goldman Sachs “engaged in unlawful self-dealing with respect to the plan in violation of ERISA, to the detriment of the plan and its participants and beneficiaries.”

It alleges the firm failed to administer the plan in the best interest of the participants and failed to use a prudent process for managing the plan. “Instead, defendants managed the plan in a manner that benefited Goldman Sachs at the expense of participants,” said the complaint.

The lawsuit alleges that Goldman Sachs retained underperforming proprietary mutual funds that an objective fiduciary would have removed.

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“These funds did not earn their high fees by outperforming their stated benchmark indexes,” said the complaint, “and their performance only worsened as time passed.”

The suit is somewhat similar to a failed class action lawsuit against American Century Investments that accused the asset manager of violating its ERISA duties by only offering its own mutual funds in its 401(k) plan. In that case, the US district court judge ruled that “it is not disloyal as a matter of law to offer only proprietary funds.”

The complaint against Goldman Sachs, however, also argues that the funds they provided performed poorly. The suit alleges that while other investors bailed on the underperforming mutual funds, the firm kept the mutual funds in its 401(K) plan. This had the effect of preventing further outflow of money from the funds. It said the company only removed the mutual funds from the plan after a series of legal rulings against other financial services firms highlighted their liability risk.

Goldman Sachs also allegedly failed to obtain lower-cost separate accounts or collective trusts instead of proprietary mutual funds. As an example, the complaint said the plan remained invested in the Goldman Sachs Mid Cap Value mutual fund, which charged it between 0.73% and 0.76% of its balance during the statutory period. Goldman Sachs, however, offered its institutional clients a separately managed account using the same investment strategy that would only have cost at most 0.55% per year.

“Defendants obtained lower-cost separate account or collective trust pricing for more than 15 unaffiliated investment options in the plan but appear to have made an exception for proprietary investments,” said the complaint. “Defendants did worse than overpay for proprietary mutual funds compared to separate accounts. Defendants also caused the plan to pay more for proprietary mutual funds than other plans invested in the same funds.”

Goldman Sach’s 401(K) plan is one of the largest defined contribution plans in the US with approximately 30,000 to 35,000 participants, and approximately $5.5 billion to $7.5 billion in participant assets.