Mutual of Omaha has been sued over investment fees it charges to administer the retirement accounts of 6,000 participants in its 401(k) plan.
The company says it disputes any claims of excessive costs or failure to act responsibly.
According to the lawsuit filed late last month in U.S. District Court in Omaha, the Omaha-based insurer, No. 342 on the Fortune 500, is overcharging its 401(k) participants, eroding their eventual investment returns. The suit seeks class-action status on behalf of the plan participants.
The company says it “disputes the claims that excessive fees were charged on the investment options in its 401(k) plan, or that Mutual of Omaha in any way failed to fulfill its responsibilities with respect to the plan.”
The suit is one of many filed in recent years against large sponsors of 401(k) plans after a U.S. Supreme Court ruling said sponsors have a duty to properly monitor investments and remove imprudent ones. The courts have found that offering investment options that charge excessive fees counts as the same thing as an imprudent investment.
So far, companies on the losing end of such suits filed by employees include aerospace giant Boeing, which agreed to pay $57 million in 2015 to settle similar allegations.
“The basis of these suits is that employers must provide their employees with 401(k) plans that are reasonably priced,” said George Morgan, a business professor at the University of Nebraska at Omaha whose specialties include the fees charged to investors.
According to the suit, filed by a company 401(k) participant living in Arizona, Mutual of Omaha since 2009 has collected more than $1 million a year in fees at the expense of its own employees.
That’s because, according to the suit, employees have been charged an investment fee by United of Omaha, a wholly owned subsidiary of Mutual of Omaha that goes out and buys mutual fund shares for the employee 401(k) plans. United of Omaha charged plan participants far more than necessary, the suit says.
Mutual of Omaha says it takes great care to properly administer its 401(k) plan.
“Mutual of Omaha regularly reviews all aspects of the 401(k) plan, including fees and other expenses, to assure that associates who participate in the plan have access to a broad range of high quality investment options and related services at reasonable cost,” the company said in a statement. “All participants are provided with detailed disclosures regarding the plan’s investment options, fees and expenses, and Mutual of Omaha fully complies with all federal laws and regulations in administering the plan.”
The company also said participants enjoy favorable eligibility provisions and vesting schedules, as well as a substantial company match.
“Mutual of Omaha continually strives to provide its valued associates a generous package of employee benefits, including the 401(k) plan, and will continue to evaluate ways to enhance those benefits,” the company said.
The costs of investing in the plan are at the heart of the lawsuit. For example, the suit says, it is possible to buy into one large and widely known mutual fund for a fee of 0.06 percent of the invested amount — in other words, a fee of $6 per $10,000 invested.
But by going through in-house United of Omaha to buy into the mutual fund, Mutual of Omaha plan participants were charged 0.38 percent of the invested amount, the suit says — in other words, a fee of $38 per $10,000 invested.
The suit called such discrepancies systematic and repeated multiple times across many mutual fund choices. With 6,000 participants and $500 million in assets, the suit says, the plan should have used its heft to achieve the lowest possible investment fees for the employees.
“Instead of using the negotiating power conferred by the plan’s size, the fiduciary defendants simply caused the plan to buy into United of Omaha’s incredibly overpriced services … and permitting plan assets to inure to the benefit of United of Omaha and Mutual of Omaha,” the suit says.
The amounts below 1 percent charged as investment fees might not sound like much, but they do add up over time: The U.S. Supreme Court wrote in a 2016 ruling that differences of “only 0.18 percent can have a large detrimental effect on investment results over time, not only from money spent on higher fees, but also lost investment opportunity.”
In other words, says William Birdthistle, a law professor at the Illinois Institute of Technology, whatever amounts the 401(k) plan charges on invested amounts are not only gone, so are the additional dollars they might have earned had they been invested in stocks or bonds instead of creamed off the top.
“Each dollar taken from you is not only lost, but so is its earnings power for the rest of your life, and the lives of your heirs who might stand to benefit as well,” said Birdthistle, author of the 2016 book “Empire of the Fund,” an investigation into the mutual fund industry.
For example, the difference between the 0.06 percent fee available for one of the Mutual of Omaha 401(k) mutual funds and the 0.38 percent charged by United of Omaha is significant: At $10,000 invested annually for 40 years, total expenses over the lifetime of the investment at 0.06 percent add up to just shy of $5,000. Fees for the same annual investment over the same time horizon at 0.38 percent would be $31,000. And that is just counting the money taken off the top, not the lost earnings from having done so.
The lawsuit is asking the court to certify it as a class-action, meaning it would come to represent the interests of thousands of participants in the Mutual of Omaha 401(k). It also asks that Mutual of Omaha pay the money back and make good any losses resulting from the conduct alleged in the lawsuit.
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