Index funds often benefit from a low-cost halo. They don’t all deserve to bask in that glow.
Allegations of excessive index fund fees in retirement plans are at the heart of a new proposed class action lawsuit brought by New York Life Insurance Co. employees against the company. The case, filed in U.S. District Court for the Southern District of New York, alleges breach of fiduciary duty under the Employee Retirement Income Security Act.
The lawsuit is part of a new wave of 401(k) suits against smaller plans. One of the New York Life plans has $600 million in assets, while the other has $2.5 billion. Earlier this month, Minneapolis-based law firm Nichols Kaster filed suits against American Century’s $600 million plan and the $1.3 billion plan at Fujitsu Technology and Business of America, Inc.
A lot of mutual fund pruning and rejiggering has gone on in the 401(k) world in the wake of high-profile lawsuits, which often involved allegations of excessive fees and resulted in multi-million-dollar settlements. A U.S. Supreme Court ruling last year also reminded plan fiduciaries about the need to continuously monitor plan investments and fees.
In recent years, money has flooded into low-cost index funds and out of more expensive actively managed funds, thanks in part to a greater focus on the large bite fees take out of already lackluster retirement balances over the long term. In the New York Life lawsuit, an index fund used in the two 401(k) plans was more profitable for the company than for plan participants, according to the complaint.
The MainStay S&P 500 index fund charged 35 basis points when similar funds from Vanguard Group could be had for 2 basis points and from State Street Global Advisors for 4 basis points, the complaint says.