Self-Dealing ERISA Challenge Targets Transamerica and Affiliates

Posted January 2nd, 2019.

As It Appeared On
Plans Sponsor

The complaint suggests Transamerica continued to offer proprietary portfolios when their rates of return were meaningfully below stated long-term benchmarks.

By John Manganaro

Participants in Transamerica’s own retirement plan have sued the company under the Employee Retirement Income Security Act (ERSIA), alleging that the plan has favored investment products managed by a Transamerica affiliate, to the detriment of participant performance.

Aegon, Transamerica’s parent company, previously settled similar class-action litigation filed in early 2015. The new complaint, filed in the U.S. District Court for the Northern District of Iowa, Eastern Division, echoes the 2015 lawsuit, but there are some differences.

“Year after year, Transamerica selected and retained poor-performing proprietary investment portfolios for the plan when superior investment options were readily available,” the new complaint states.

Specifically, Transamerica is accused of “imprudently retaining” the following portfolios: Transamerica International Equity Portfolio, Transamerica Small Core Portfolio, Transamerica Large Value Portfolio, Transamerica Large Growth Portfolio, Transamerica High Yield Bond Portfolio, and Transamerica Mid Value Portfolio.

“The underperformance of these portfolios, relative to several meaningful benchmarks, was neither modest nor temporary,” the complaint says. “For example, during the 2008 to 2017 time period, the International Equity Portfolio underperformed its benchmark, the Morgan Stanley All-World Country Index ex-USA, by approximately 30%. During the same period, the Small Core Portfolio underperformed its benchmark, the Russell 2000 Index, by over 15%.”

In their complaint, plaintiffs cite the plan’s own disclosure documents, showing the International Equity Portfolio, the Small Core Portfolio and the Mid Value Portfolio each underperformed their respective investment benchmarks for the past one-, five-, and ten-year periods. The Large Value Portfolio, the Large Growth Portfolio, and the High Yield Portfolio each underperformed their respective investment benchmarks for the past five and ten-year periods, the complaint says.

Allegations in the text of the complaint put an emphasis on a warning that ERISA experts have been sharing heading into 2019, based on the results of both recent regulatory audits and litigation. This is to say, if a fund on a DC plan menu has been underperforming its stated benchmark for a long period of time and no action has been taken, this is a clear red flag. Especially if an underperforming fund has been put on a watch list and has continued to struggle for a longer and longer period without being dropped, this will attract the attention of regulators and litigators. Even if plan fiduciaries feel like their decisions were/are justified in keeping such funds, and that a complaint is ultimately without merit, it’s very likely that a district court judge will feel that a discovery process should be allowed, and thus that a trial will proceed beyond the summary dismissal phase. This dynamic has already led to many plan sponsors settling lawsuits they felt they could otherwise likely win.

“As the investment adviser to the Transamerica investment portfolios, Transamerica Asset Management—and by extension Transamerica—was or should have been aware of the portfolios’ poor annual investment performance on a real-time basis,” the complaint states. “Any reasonable, disinterested investor monitoring their investments would have viewed these portfolios as imprudent investments and removed them from the plan. Instead, Transamerica continued to offer proprietary portfolios when their rates of return were lower than meaningful benchmarks.”

Plaintiffs say that Transamerica therefore neglected its duty to monitor the plan’s investments and remove imprudent ones.

“Transamerica’s failure of effort and/or competence cost the plan’s participants millions of dollars in poor investment performance every year,” the complaint states. “Moreover, Transamerica exacerbated plan participants’ losses by encouraging them to sign up for Transamerica’s Portfolio Xpress, a tool that automatically allocated participants’ money to Transamerica’s investment products. Upon information and belief, Portfolio Xpress increased the likelihood that participants would invest in one of Transamerica’s imprudent proprietary portfolios.”

A Transamerica representative offered the following statement in response to the complaint: “Reflecting our core mission, Transamerica provides a retirement plan with matching contributions to our employees to help them prepare for a secure and confident retirement. In addition to proprietary funds, many of which are sub-advised by unaffiliated investment managers, our plan includes a range of non-proprietary funds (both actively and passively managed), low-cost collective investment trust funds and a subsidized stable value fund—and gives participants the option of investing in a variety of mutual funds through a Schwab brokerage window. Transamerica also waives all plan recordkeeping fees. Our business complies with all applicable state and federal statutes and regulations, and participates in periodic regulatory reviews. The allegations of wrongdoing against Transamerica in the recently filed lawsuit—which focuses on six ‘proprietary investment portfolios’ in the plan—are false and we will vigorously oppose the case.”

The full text of the compliant is available for download here.

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