Principal, Red Cross sued over 401(k)s

Principal Financial is facing fresh claims over the handling of its 401(k) plan, several years after the insurer settled a separate class-action case for $11 million.

The new lawsuit, which was filed late last month in U.S. District Court in the Southern District of Iowa, alleges the firm breached its fiduciary duty under the Employee Retirement Income Security Act in connection with the use of its own investment products on the plan menu. The law firms that brought the case also allege that Principal charged more than a reasonable rate for the record-keeping services it provided to its own plan participants.

In a statement, Principal refuted the claims.

“We disagree with the allegations in this lawsuit and will vigorously contest them,” the company stated. “Principal has always been committed to offering meaningful benefit programs to employees and is one of many companies in the industry that have had lawsuits filed against them making these kinds of claims.”

The proposed class includes participants who were in Principal’s defined-contribution plans between Aug. 1, 2015 and the present. The company’s two DC plans represented nearly $3 billion in assets among more than 14,000 participants as of the end of 2019.

At the heart of the case are the advisory fees Principal collected from the investments on the plan menu. Aside from the brokerage window, the plans were exclusively with Principal investment products, including pooled separately managed accounts that held underlying funds sub-advised by third-party firms, according to the complaint. In some cases, the fees paid to those firms to manage the assets were a small proportion of the total advisory fees charged to participants using those investments, the plaintiff stated.

Total fees for investments and administrative services were higher than peer averages, according to the complaint. Further, the case alleges that Principal failed participants by keeping some of its own index funds on the plan menu, as those investments had high rates of tracking error and higher fees than options available from competitors.

Although the company settled a similar case in 2015 over alleged fiduciary violations related to the plan’s investment options, there are some differences in the recent case, law firms Pugh Hagan Prahm and Scott and Scott Attorneys at Law wrote. The new case, for example, includes allegations related to the target-date series in the plan, as well as index-fund tracking error and failure to monitor investments, they noted.


The American Red Cross’s retirement plan needs rescuing, according to lawyers who this week brought a class-action lawsuit against the organization.

The plan’s fees for both investment management and administration were many times that of peers, according to the class-action complaint filed by law firm Capozzi Adler, which last year brought more ERISA lawsuits over 401(k)s than any other litigator. The complaint was also brought by lawyer Christopher Battista.

The roughly $1.2 billion plan, which serves about 22,000 participants, includes collective investment trusts on its menu. Those products are identical to other CITs managed by the companies that sponsor them, except for the plan’s CITs being branded with the American Red Cross name, according to the complaint. That alone resulted in the investments having fees of anywhere between more than twice that of otherwise identical CITs to 16 times as high, the plaintiffs stated.

“There is no good-faith explanation for utilizing branded funds when lower-cost unbranded products are available for the exact same investment,” the complaint read.

Participants also paid record-keeping costs of more than $200 per person in 2019, which is more than four times as high as the rates paid by comparably sized plans, according to the lawsuit.

In a statement, the American Red Cross said the claims are not valid.

“To the contrary, we believe that the Red Cross 401(k) plan has been well managed and provides a valuable benefit to our employees. We do not believe any litigation against our plan would have any merit and plan to defend vigorously,” the group said. “Plaintiff law firms have been very active in soliciting participants in company 401(k) plans to pursue litigation against plans and employers, and this is part of an uptick in litigation in this area. Many of these lawsuits have been shown to be without merit.”

The post Principal, Red Cross sued over 401(k)s appeared first on InvestmentNews.

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