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Class-Action Suit Over Allstate 401(k) Plan Can Go Forward

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What You Need to Know

  • A District Court judge has allowed plaintiffs to go forward in the suit against Allstate and its 401(k) plan fiduciaries.
  • The plaintiffs argue that Northern Trust target date funds underperformed relative to their peers.
  • Financial Engines and Alight charged fees without rendering additional services, the lawsuit states.

A class-action lawsuit against Allstate Corp. and its 401(k) fiduciaries, that complains about Northern Trust, Financial Engines and Alight Financial Advisors, can go forward after a judge in U.S. District Court for the Northern District of Illinois dismissed the defendants’ motion to dismiss the suit on Tuesday.

The complaints against Allstate et al. are being brought by seven current and former Allstate employees as well as on behalf of two “putative” classes of beneficiaries. The plaintiffs stated that the company’s 401(k) plan’s fiduciaries “made and failed to remove imprudent investments, saddled the plan with excessive fees and caused the plan to make prohibited transactions” under the Employment Retirement Income Security Act.

The lawsuit, against Allstate and its plan fiduciaries, complains about Northern Trust, which offered the only target date funds in the Allstate investment options; Financial Engines, which provided “robo-advice” to the 401(k); and Alight Financial Advisors, which provided “professional management.”

Northern Trust, Financial Engines and Alight are not named as defendants.

According to the suit, at the end of 2019, $700 million was invested across the 11 TDFs. Participants could opt into the professional management program, which charged an asset-based fee that allowed it to assume discretionary authority over a plan participant’s account. Financial Engines provided online advice and charged a flat fee to all participants for “the ability to access investment advice in the plan’s portal. Financial Engines ran these programs from 2014 until 2017,” according to the suit.

District Judge Manish S. Shah noted in the dismissal that the result of the robo-advisor was “largely standardized (not customized) portfolios for each participant, typically without human interaction between an advisor and a participant.”

Alight replaced Financial Engines in 2017 but hired Financial Engines to provide sub-advisory services, according to the document. Alight charged participants on a tiered-fee schedule, .45% for the first $100,000 to .25% for amounts above $250,000, for its professional management.

“Financial Engines charged higher fees,” according to the lawsuit. “So, the more money in a participant’s account, the more money Financial Engines and Alight made, even though no additional costs or services had been rendered. From 2015 to 2019, plan participants paid Financial Engines and later Alight anywhere between $1,265,509 and $2,667,972 in annual advisory fees.”

The plaintiffs also alleged that Allstate “constructed a plan with far too many layers of fees, and for participants who signed up for Financial Engines (and later, Alight), the total fees were so high it was difficult to break even on their investments.”

The plaintiffs alleged that Allstate and its plan fiduciaries “turned a blind-eye to a pay-to-play kickback scheme” between Financial Engines and the plan’s recordkeeper that exclusively featured Financial Engines to its clients.

As for Northern Trust, the TDFs “performed worse than 70 to 90 percent of comparable funds, but the Allstate defendants failed to remove the suite as the plan’s default retirement investment option,” the plaintiffs stated.

Shah dismissed the defendants’ motion, asking for defendants to file a status report with proposed discovery schedule by Oct. 26.

Separately, Northern Trust was hit in June with a class-action suit by its own current and former employees for loading up its retirement plan with poorly performing proprietary target date funds. The firm said in a statement at the time that it “believes the Northern Focus Funds have been an appropriate vehicle for retirement savings, and plans to defend itself from the lawsuit’s claims.”