Financial services firm John Hancock is being sued for including proprietary products in its retirement plans. The consumer class action is led by a former employee who alleges that the company broke the law by offering proprietary products in the company’s employee 401(k) plan.
The plaintiff states that she suffered financial harm by investing in John Hancock's products when she could have invested in other lower-cost investments from third parties that produced higher returns.
According to the records, Ms. Baker participated in the John Hancock 401(k) plan from 2014 to 2019.
Many Firms Under Scrutiny for 401(k) Plan Products
John Hancock is not the only firm that has been accused of "self-dealing" in recent years. Others, including Goldman Sachs, Morgan Stanley, Charles Schwab, and Prudential, also have been questioned over their retirement plans.
According to the Center for Retirement Research at Boston College (CRR), as of 2018, there were 40+ class actions filed against financial firms for including their products into their 401(k) menus.
Legally, mutual fund sponsors and other financial services firms may add in-house products to their retirement plans; but, they must go through a meticulous selection process.
Employers and financial service providers must must consider the performance, cost, and other relevant benchmarks before including investment funds in 401(k) plans.
According to the CRR report, plan fiduciaries are prone to face this type of litigation when their funds experience poor historical performance when compared to similar 'benchmark' funds.
John Hancock Plan Included Thousands of Employees
The John Hancock 401(k) plan was founded in 1988. And according to Labor Department data aggregated by BrightScope, as of 2018, it held $1.6 billion among 9,800 participants.
The plan uses a group annuity structure in which members choose among various investment options — all of which allegedly have been the John Hancock proprietary products since 2014, as explained in Ms. Baker's complaint.
The accusation also cites that the company's Multimanager Lifestyle Balanced, Conservative, Moderate, Growth, and Aggressive funds represented $295 million in plan assets. But, when compared to competitors such as American Funds, Fidelity Investments and Vanguard, the firm has high fees and weaker performance in its target-risk and target-date funds.
Also, according to the complaint, John Hancock's Multimanager Lifetime target-date funds comprised $500 million of the firm's 401(k) assets as of 2018. However, much like its other funds, the products were pricier and had lower net returns when compared to other similar alternatives from American Funds, T. Rowe Price, TIAA, and Vanguard.
Additionally, the 401(k) plan supposedly had extremely high administrative expenses during the class period, which dates back to 2014. The participants covered those expenses through a 0.1% revenue-sharing fee baked into the mutual fund costs.
John Hancock Plan Prioritized Proprietary Products for Profit
The complaint states that the firm used the plan, one of the largest 401(k) programs in the U.S., to promote John Hancock's proprietary financial products and earn profits for the company.
The plaintiff is seeking compensation for the alleged losses, disgorgement, interest, legal fees, and other possible awards on behalf of the proposed class.
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