Investors Investigate Mutual Fund ERISA Lawsuit

San Jose, CAEmployees of financial firms are investigating the possibility of a lawsuit against their employers, alleging that their money was improperly invested in mutual funds. They argue that their money could have been invested in funds that have lower fees than mutual funds do and it was inappropriate for the money to be invested in mutual funds.

According to an expert in the securities field, some financial services companies have their own mutual fund families that may be two, three or four billion dollars in size. However, any account that is over $30 million is inappropriate to purchase as a mutual fund. Rather, accounts of over $30 million should bypass the mutual fund and contact a money manager because a lower fee could be negotiated through the money manager than could be obtained through a mutual fund.

"Many financial service companies are engaged in the business of distributing mutual funds and those same mutual funds are those that their own employees have to choose from," says the expert, who prefers to remain anonymous. "I can offer my employee a 401(k) plan because I do not have an interest in those funds. The banks have an interest in those funds and it is improper to invest in the mutual funds that they manage, when they could do it a lot cheaper.

"You have to understand that your 401(k) plan generally offers an array of mutual funds for the employees to choose from. I might choose one and you might choose another. The participants do not own the funds; the plan owns the funds. The participants are not direct owners. You have a billion dollar plan that is leveraged to negotiate, but they put the money in mutual funds that they distribute, so they make a lot of money off of it.

"So these sponsors, they have a huge amount of money that the participants or employees—their only choice is the bank's own mutual fund and it is really self-serving."

Not only is it self-serving, but it may constitute a violation of ERISA laws. Under ERISA laws, fiduciaries must put the needs of the investor before the needs of the fiduciary. This includes a duty to negotiate a better price where possible. If money is being improperly invested in mutual funds and participants are charged higher fees than necessary because of it, then the needs of the participants are not coming first.

People who work for companies in the financial services business who offer their own mutual funds to employees may be eligible to join a lawsuit against their employers. Some lawsuits have already been filed while other employees are currently investigating the possibility of filing their own lawsuit.