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Cases have been won against plans that used more expensive share classes of a given fund than they needed to. Outside of that, I haven't seen any rulings against a plan sponsor for using a more expensive fund or one that in hindsight happened to perform less well than a similar fund.
Instead of complaining that Principal's index fund costs more than Vanguard's, the lawyers are faulting the plan sponsor for going with an underperforming (by 7 basis points) fund. But as noted above, that's a losing argument unless one also claims that Principal and Vanguard S&P 500 index funds are substantially identical - a question even the IRS hasn't dared to touch.
So the lawyers are presenting a novel theory - that it isn't underperformance that's at issue, but tracking error. Problems with this are: - tracking error can't be shown by underperformance (consistent underperformance equates to perfect tracking), and - tracking error does not necessarily entail underperformance.
It sounds like the lawyers are trying to mislead the court - pawning off simple underperformance as something else, here so called tracking error.
The article mentions another case, one that settled. There, the sponsor Anthem was using Vanguard Investor class shares instead of Institutional class shares. (That's something the article didn't mention, and IMHO might have been a winner for the plaintiffs.) The article does say that the sponsor could have used cheaper collective investment trusts rather than mutual funds.
The problem with that claim is that once again we're looking at apples and oranges. CITs and OEFs have different advantages and disadvantages. Management cost is not the end all. Here's a paper from Legg Mason selling CITs, but with a page that acknowledges a few of their downsides. Notably lack of transparency. I infer from that that the plan sponsor has greater oversight responsibility as well, i.e. an added cost.
I'm not saying there isn't a lot of overcharging going on in the defined contribution industry. I just don't think that going after a few basis points is addressing that problem.
Comments
Principal S&P Large Cap 500 fund ERs by share class.
Instead of complaining that Principal's index fund costs more than Vanguard's, the lawyers are faulting the plan sponsor for going with an underperforming (by 7 basis points) fund. But as noted above, that's a losing argument unless one also claims that Principal and Vanguard S&P 500 index funds are substantially identical - a question even the IRS hasn't dared to touch.
So the lawyers are presenting a novel theory - that it isn't underperformance that's at issue, but tracking error. Problems with this are:
- tracking error can't be shown by underperformance (consistent underperformance equates to perfect tracking), and
- tracking error does not necessarily entail underperformance.
Here's a 4 page paper by Vanguard to help in Understanding excess return and tracking error
It sounds like the lawyers are trying to mislead the court - pawning off simple underperformance as something else, here so called tracking error.
The article mentions another case, one that settled. There, the sponsor Anthem was using Vanguard Investor class shares instead of Institutional class shares. (That's something the article didn't mention, and IMHO might have been a winner for the plaintiffs.) The article does say that the sponsor could have used cheaper collective investment trusts rather than mutual funds.
The problem with that claim is that once again we're looking at apples and oranges. CITs and OEFs have different advantages and disadvantages. Management cost is not the end all. Here's a paper from Legg Mason selling CITs, but with a page that acknowledges a few of their downsides. Notably lack of transparency. I infer from that that the plan sponsor has greater oversight responsibility as well, i.e. an added cost.
I'm not saying there isn't a lot of overcharging going on in the defined contribution industry. I just don't think that going after a few basis points is addressing that problem.