Federated Hermes sued over using own funds in its 401(k)

investmentnews.com:

A former Federated Hermes employee this week sued the company because it included its own funds in the company’s 401(k) plan.

The asset management firm is latest to be targeted by a plaintiff’s law firm over the issue of using in-house products rather than comparable funds from outside providers that might have better performance records and lower fees.

The plaintiff in the proposed class-action case, Nicholas Koroly, claims Federated Hermes breached its fiduciary duties and engaged in prohibited transactions by filling its 401(k) menu exclusively with its own U.S. mutual funds.

A substantial number of the funds underperformed their benchmarks over five years as of September 2019, according to the complaint, and some of that subset of funds had higher fees than comparable third-party funds. The higher fees ranged from 1 basis point to 71 bps, and funds lagged benchmarks over five years by anywhere from 3 bps to over 13 bps annually, the plaintiff stated.

“That defendants selected [Federated Hermes Investments] proprietary funds to the exclusion of any and all other investment options on the market is not coincidental,” the complaint reads. “Given the widespread availability of other suitable investment options offered by non-FHI affiliated competitors in the marketplace, it is implausible that defendant’s exclusion of all other funds offered by its competitors was the result of an impartial fiduciary decision-making process.”

Numerous other financial services companies, ranging from Janus Henderson to Goldman Sachs, have faced similar lawsuits in the past.

The threat of that type of litigation puts fund companies in an awkward position. Including their own products on their 401(k) menus would seem to show that they