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Portfolio > Alternative Investments > Hedge Funds

Capital Group, American Funds Sponsor, Sued for Using Own Funds in 401(k) Plan

By Janet Levaux

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The Capital Group Companies, the sponsor of American Funds, has been hit with a class-action lawsuit over its use of in-house funds in its employee retirement plans.

The case, Patterson v. Capital Grp. Cos., was filed in a federal court in California, where the firm is based.

According to the court filing, the plaintiffs brought the case under the violations of “fiduciary duties and prohibited transaction provisions” related to the Employee Retirement Income Security Act of 1974 (or ERISA).

“The complaint is without merit,” the Capital Group said in a statement.

In the 2011-2016 period, the plaintiffs claim, between 95% to 98% of options for employees have been funds that with companies affiliated with the Capital Group, namely American Funds.

Funds investing in “unduly expensive Capital Group-affiliated options,” they add, totaled $1.6 billion to $3 billion over this six-year timeframe for the employees.

These investment options were not adequality monitored for “both reasonable costs and performance levels through and impartial or product process,” according to the plaintiffs.

These violations, they add, “resulted in plan participants and beneficiaries paying excessive and prohibited fees that substantially diminished their retirement savings, and resulted in windfall profits for the Capital Group and its subsidiaries.”

American Funds Disagrees

The American Group parent, of course, begs to differ.

“The funds offered to our associates are recognized in the industry as having among the lowest fees in their peer categories and superior investment results,” it explained.

“Capital Group also makes an annual contribution equal to 15% of an employee’s annual compensation (up to IRS limits), a benefit that ranks among the most generous offered within and outside the financial services industry. This contribution is made whether or not the employee contributes to the plan,” the firm said.

American Funds are not alone in being targeted for ERISA-related lawsuits. Other firms being hit with them include Allianz, American Century, Edward Jones, Franklin, New York Life Principal Life, Putnam and TIAA.

According to Morningstar, American Funds is the largest active fund family with $1.36 trillion in assets as of April 30; it has no passive funds. Vanguard is the largest passive fund family with nearly $3 trillion in passive-fund assets and close to $900 billion in active-fund assets.

In the 12 months ending April 30, Morningstar says, investors pulled a total of roughly $5 billion out of American Funds; in April, though, they invested $3 billion in these products.

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Editor’s note: This version of the story corrects an earlier misstatement of American Fund’s active fund assets as tracked by Morningstar. 

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