One would think that employees at the largest bank in the United States could rest assured that their retirement savings were in the best hands. As one of the largest asset managers in the world, JPMorgan understands the importance of being a fiduciary.
On Wednesday, a participant in JPMorgan's $21 billion 401(k) plan filed a class action lawsuit against the bank, claiming that its retirement fund managers picked in-house investment products over cheaper rivals, costing employees “tens of millions of dollars in losses.”
Not only did the retirement committee choose pricier JPMorgan products for its employee retirement funds, the lawsuit claims, they also failed to structure the investments as collective trusts, which are commonly used by large institutional investors to reduce costs. The suit also questions the retirement committee's use of JPMorgan business partner BlackRock for passive investments when other vehicles would have been cheaper.
Personally naming CEO Jamie Dimon and more than a dozen other executives as defendants, the suit accuses JPMorgan of failing to avoid conflicts of interest – essentially shafting some employees in order pad the pockets of others. “Company bias has been ‘baked into’ the system,” the lawsuit stated, leading to higher payouts to the bank and its affiliates at the expense of retirement funds.
“We have just received the complaint and are still reviewing it,” JPMorgan said in a statement. “We disagree with the central allegations and look forward to defending the claim in court.”
JPMorgan isn't the first major bank to face accusations from employees of mishandling retirement funds. A lawsuit last year alleged that Morgan Stanley inappropriately invested its employees' nest eggs, in part by choosing its own costly products over cheaper alternatives.
Ironically, it seems to have been JPMorgan's attempt to reduce fees that brought the issue to the plaintiff's attention. According to the suit, scrutiny of the 401(k) plan began when the was being investigated by the SEC over its preference for placing asset management clients in its own proprietary products. The bank settled that affair in late 2015 – around the same time that some of the highest-fee investments were phased out of the 401(k), the lawsuit says.
That might have spooked the bank into action. “While the SEC investigation was ongoing in 2015, a comprehensive review of the Plan’s investment options into its own proprietary and BlackRock investment options was finally undertaken,” the suit says. As a result of the house-cleaning, some of the most expensive in-house options were jettisoned.
Here's how the plan's investment fees looked at the start of 2015. In red are products managed by JPMorgan, which included small and mid cap mutual funds and a bond fund. Roughly half of the plan's investment options sat in various JPMorgan-adminstered vehicles between 2010 and 2015, the suit states.
By the end of that year, each of those mutual funds had either been swapped out with a low-fee passive vehicle or otherwise restructured to reduce fees. Even BlackRock's fees were bargained down around this time, as a chart in the lawsuit attests:
As in any case that alleges breach of fiduciary duty, a whole universe of context is required to show that JPMorgan's plan sponsors could and should have found better investments with lower fees. If JPMorgan's in-house products outperformed passive investments net of fees, you can't fault the fiduciaries too much. Then again, the alleged housecleaning in late 2015, which involved the highest-fee in-house products, suggests that the bank knew it could do better.
The plaintiff, Illinois resident Terre Beach, has a 2020 target-date fund and is the only employee listed in the suit. Not all employees were harmed, though. One cheer for the small and mid cap fund managers.
Are you a JPMorgan 401(k) participant? Do you feel robbed and exploited by your employer? Alternatively, do you miss dearly the JPMorgan small and mid cap mutual funds that used to be in your 401(k)? Feel free to drop us a line and tell us all about it.