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Velazquez v. Massachusetts Financial Services Co.

United States District Court, D. Massachusetts

July 19, 2018

MELISSA VELAZQUEZ, individually and as representative of a class of similarly situated persons, and on behalf of the Massachusetts Financial Services Company Defined Contribution Plan and the Massachusetts Financial Services Company MFSavings Retirement Plan



         Plaintiff in this purported class action challenges the management of two retirement plans, with allegations that Defendants Massachusetts Financial Services Company d/b/a MFS Investment Management, the Massachusetts Financial Services Company Retirement Committee, the Massachusetts Financial Services Company Retirement Investment Committee, MFS Service Center, Inc., and John Does 1-30 have violated the Employee Retirement Income Securities Act (“ERISA”), 29 U.S.C. § 1001 et seq. Defendants move to dismiss. For the reasons stated below, the motion is allowed in part and denied in part.

         I. Background[1]

         ERISA requires that fiduciaries act “solely in the interest of the participants and beneficiaries, ” 29 U.S.C. § 1104(a)(1), with the “care, skill, prudence, and diligence” that would be expected in managing a plan of similar scope. 29 U.S.C. § 1104(a)(1)(B). These general duties of loyalty and prudence are refined in 29 U.S.C. § 1106, which prohibits fiduciaries from engaging in certain transactions alleged to have occurred here.

         Plaintiff is a former employee of defendant Massachusetts Financial Services Company (“MFS). During the relevant period, MFS offered eligible employees two tax-deferred retirement plans: the employee-funded Massachusetts Financial Services Company MFSavings Retirement Plan (“Employee Plan”), and the employer-funded Massachusetts Financial Services Company Defined Contribution Plan (“Employer Plan”), (together, the “Plans”). Under the Employee Plan, employees could elect to contribute anywhere from one to 85 percent of their salary to their plan account, whereas MFS contributed an amount equal to 15 percent of participants' salary to the Employer Plan.

         Plaintiff participated in the Employer Plan until 2014, but asserts claims on behalf of both Plans and a putative class comprised of “[a]ll participants and beneficiaries of the [Plans] at any time on or after July 7, 2011 . . . .” Compl. ¶¶ 8-9, 125. She alleges essentially that instead of acting in the best interest of the Plans and their participants, defendants used the Plans as an opportunity to promote their own mutual fund business to participants' detriment. MFS funds comprised “the vast majority” - up to 98 percent - of the investment options in both Plans since at least 2011. Compl. ¶¶ 24, 26, 67. Even the Plans' nonproprietary funds are alleged to have benefited MFS in that the alternatives, known as Russell Funds, were managed by various subadvisors including MFS affiliates.

         Both Plans used the same processes for selecting and monitoring investments, and both used the same recordkeepers, compensated the same way. Accordingly, plaintiff alleges that “the two plans operated functionally as though they were a single plan.” Compl. ¶ 24. Combined, the Plans had $515, 246, 820 in assets as of the end of 2012. For both Plans, MFS was a Plan sponsor and named fiduciary, and had authority to appoint and remove members to the advisory committees. All such members were MFS employees appointed by the MFS Board of Directors. MFS acted during the relevant period as investment manager for each of the proprietary funds, in exchange for which it collected monthly fees from Plan assets invested in proprietary funds; as such, it is a “party in interest” under 29 U.S.C. § 1002(14). MFS then applied a portion of its monthly management fees to pay the Plans' recordkeeper and to compensate MFS Service Center, Inc.[2]

         MFS delegated a portion of its fiduciary responsibilities for investing Plan assets to the Investment Committee, which was charged with maintaining and monitoring the Plans' investments. MFS similarly delegated a portion of its fiduciary responsibilities for administering Plan assets to the Retirement Committee, which selected record keepers and determined their compensation. During the relevant period, the Investment Committee removed no MFS funds from the Plans, though plaintiff alleges the funds contained many duplicative investments. She complains as well of duplicative additions of high-fee Russell funds “generally rejected by other defined contribution plans” during the relevant period. Compl. ¶ 74. Indeed, by the end of 2015, “the Plans were the only two defined contribution plans (out of over 3, 000 with more than $200 million in assets) to offer any of the Russell funds included within the Plans at the time.” Id.

         Due in part to defendants' failure to remove expensive, under-performing proprietary funds, plaintiff alleges the Plans' expenses were significantly higher than those of comparable retirement plans. Specifically, “estimated total Plan costs for 2012 were approximately $4, 416, 791, or 0.86% of the more than $515 million in assets within the Plans.” Compl. ¶ 79. By contrast, the median total cost in 2012 for plans with between $500 million and $1 billion in assets was 0.45%; for plans in the $250-$500 million asset range, 0.47%; and for plans in the $100-$250 million range, 0.57%. For 2014, $5, 366, 667 in costs represented 0.80% of the more than $670 million in combined plan assets, whereas the median cost for plans of that size was then 0.44%. Plaintiff thus alleges that “in 2012 the Plans were approximately 91% more expensive than the median similarly sized plan, and in 2014 they were 82% more expensive.” Compl. ¶ 80. Less expensive nonproprietary alternatives - both actively and passively managed - offered similar or better performance, but defendants failed to use them because to do so would have been contrary to their business interests.

         Plaintiff further alleges that defendants failed to obtain the lowest-cost share class of numerous mutual funds in the Plans, even though lower-cost share classes are routinely available to institutional investors with over $1 million in assets and attendant increased bargaining power, and even though more expensive share classes offer no additional value. For example, the Committees retained institutional shares of the MFS Growth and Value Funds with expense ratios of 0.87% and 0.71% despite the availability of identical R5 shares with expense ratios of 0.78% and 0.60%. As a result, MFS collected higher fees for the same services it would have provided had the Plans owned the cheaper R5 shares of the Growth Fund; the same was true of at least 38 other funds in the Plans.

         Also reflected in the Plans' high costs are excessive recordkeeping fees. The cost of recordkeeping services depends on the No. of participants in a plan, and plaintiff estimates that a “normal range” for plans like those at issue would have been $50-80 per participant. Compl. ¶ 98. Instead, defendants paid in excess of $500 in recordkeeping fees per participant until September 2015, when they changed providers.

         Another factor contributing to high Plan costs was defendants' failure to invest in non-mutual fund alternatives like separate accounts and collective trusts, which carry significantly lower fees, despite offering them to shareholders in other plans.

         Finally, in addition to failing to remove duplicative funds as alleged above, defendants failed to monitor and remove poorly performing funds. Plaintiff cites the Plans' money market funds specifically, which returned 0.01% or less from 2011 through 2015 but featured expense ratios over 0.60%. In contrast, stable value funds offer the same protection of principal with reliably better returns. Defendants did offer a stable value fund for a time, but liquidated it without replacement in 2014 after years of underperformance.

         Plaintiff sues defendants for breach of the fiduciary duties of loyalty and prudence (Count I), failure to monitor fiduciaries (Count II), prohibited transactions with a party in interest (Count III), prohibited transactions with a fiduciary (Count IV), and equitable restitution of ill-gotten proceeds (Count V). She lacked knowledge of material facts necessary to understand the alleged ERISA violations until she filed her complaint, and continues to lack actual knowledge of the specifics of defendants' decision-making processes. Defendants move to dismiss. In addition to arguing that plaintiff has failed to state a ...

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