An investigation has begun into the activities of banks and financial services companies that offer their own mutual funds to employees. Frequently employee 401(k) funds are the largest investor in the employers own mutual funds. The appropriate amount to be invested in mutual funds according to the Institute of Fiduciary Studies for a 401(k) is no more than $30 million because of the high fees associated with mutual funds for management fees and other charges. Investors, including 401(k) plans, when all of the participants assets are aggregated, if the assets total more than $30 million have the financial clout to negotiate with money managers directly for lower fees.
When banks and financial services companies offer their own mutual funds
to participants in 401(k) plans they establish for their employees, and
they do not negotiate lower management and other fees they are violating
their fiduciary duty to act solely in the 401(k) participants best
interests.
According to an expert in securities, the Institute for Fiduciary Studies has set the limits for the appropriateness of mutual funds as an investment vehicle for 401(k) participants at an aggregate of $30 million. He notes that some of these larger financial institutions have 401(k) plans with hundreds of millions of dollars invested in mutual funds, which is far more than appropriate for an investor to invest in mutual funds. These companies make money from offering their own mutual funds to employees, with higher fees, which places them in a conflict of interest and in violation of their fiduciary duty under a federal law known as ERISA.
Under ERISA fiduciaries have a duty to act solely in the best interests of plan participants, and not in their own interest. By not investing in stocks managed by the same money managers that are managing the mutual funds at a much lower cost, the fiduciary is not acting in the best interest of plan participants but in their own interest.
The investigation is centered around the possibility of a class action lawsuit against certain banks and financial companies that offer their own mutual funds to employees when the 401(k) plan has more money than is appropriate investment in mutual funds. Current or past employees of banks and financial companies that offer their own mutual funds to plan participants may be eligible to join a class action lawsuit against such firms.
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