Late last month, a group of workers at Ameriprise Financial Inc. filed a lawsuit in federal court against their employer, accusing the company of stuffing its 401(k) plan with expensive, underperforming mutual funds that came from the company’s own investment management arm. According to the suit, the company placed 401(k) contributions in proprietary funds that charged plan participants $20 million in excess costs.
The workers allege that Ameriprise and its committees, as the plan’s overseers, violated their fiduciary duty to the retirement plan. Investments in the 401(k) plan included mutual funds from Ameriprise subsidiary RiverSource Investments LLC, which is now known as Columbia Management Investment Advisers LLC. (Ameriprise seems to be developing a history of changing the name of their funds frequently to avoid having mutual funds with negative reputations. For example, Ameriprise funds recently utilized the RiverSource name for only five years).
According to the suit, “Defendants chose more expensive funds with inferior performance histories in order to generate revenue for Ameriprise. An investigation would have revealed to a reasonably prudent fiduciary that the RiverSource investment managers investing in RiverSource mutual funds were imprudent.”
The lawsuit highlights several concerns many fee-only financial planners have about their industry. First, as the majority of financial advisors work on a commission basis, there is always concern that advisors will direct their client’s assets into investments that pay the largest commission, not the investments that are necessarily the best option for the client. According to Ron Lieber of the New York Times, since the vast majority of Ameriprise’s revenue comes from investments in the company’s in-house insurance, annuities, and mutual funds, the firm’s success depends on advisors steering client investments into those products.
Second, there is always the concern (and in many cases, plenty of documentation) that proprietary investment options are excessively expensive and provide performance that is under par. In this case, the RiverSource target date funds used by the 401(k) plan cost investors .84% - .94% each year in fees, while a Vanguard alternative charges .10% -.18% in annual fees. Further, workers claim that the RiverSource funds lagged their benchmarks and received poor performance ratings from Morningstar Inc.
The lawsuit provides further support for the contention that fee-only financial planners are in a unique position to focus on what is best for clients. As fee-only advisors never receive commissions from the products they recommend, their job as fiduciaries is to concentrate on recommending the investments with the best performance records and lowest fees at all times. If you haven’t spoken with a fee-only financial planner to confirm you have cost-efficient, high-performance investments in your portfolio, call our office to schedule a complimentary consultation.