SAN DIEGO — Three participants in the GE Retirement Savings Plan are suing the company and the plan trustees for $700 million, saying they breached their fiduciary responsibilities and engaged in double-dealing.
Attorneys for the three plaintiffs — two San Diego women and a Texas man, all former GE employees — are seeking class-action status in the complaint filed Tuesday in federal court in San Diego. They say roughly 250,000 other plan participants have been similarly harmed by the company’s use of mediocre investment funds and its management of the plan for the benefit of the company.
The GE Retirement Savings Plan contains total assets in the $28 billion range; it is one of the largest 401(k) plans in the nation.
The lawsuit covers the period from Jan. 1, 2011, to June 30, 2016 — the day before General Electric completed sale of GE Asset Management, its investment management business, to State Street Corporation.
Before the sale, the complaint alleges, decisions by GEAM caused its plan members — to whom GE had a fiduciary responsibility to put first and foremost in its strategy and actions — to lose out on hundreds of millions of dollars in potential investment gains.
General Electric responded: “We have no comment on ongoing litigation but we intend to fully defend the case.”
The complaint singles out five investment funds for criticism:
- GE Institutional International Equity Fund
- GE Institutional Strategic Investment Fund
- GE RSP U.S. Equity Fund
- GE RSP U.S. Income Fund
- GE Institutional Small Cap Equity Fund
All but Small Cap lagged market benchmarks, some by a wide margin, the complaint states. “Any prudent fiduciary,” the complaint states, would not have selected them in the first place, or else would have gotten rid of them when they started missing market performance benchmarks.
The International Fund, for example, underperformed most similar funds in all but two years from 2008 to 2016, the complaint states, lagging 90 percent of all comparable funds in its worst year.
In another example, the complaint states the Strategic Fund had a cumulative growth of 49.5 percent from 2010 to 2016, vs. 101.5 percent for a comparable T. Rowe Price fund, 88.7 percent for an American Funds fund, 76.5 percent for a Vanguard fund and 76 percent for a Fidelity Fund. “GE would likely have had to scour the market to find an offering as poor-performing as the Strategic Fund,” the complaint states.
The one bright spot in terms of performance was Small Cap, the complaint states. However, it alleges, GEAM did not perform hands-on management of its assets, instead, it hired multiple sub-advisers to manage the fund and kept 30 percent of the management fee.
This, too, was a violation of the federal Employee Retirement Income Security Act, the complaint alleges.
GEAM’s poor management of GE Funds should have prompted General Electric to select a more lucrative investment option for the Plan’s participants, the complaint reads, but instead, GE retained GE Funds because it stood to benefit from the investment management fees GEAM was collecting from the plan’s participants.
Further evidence of GE’s self-dealing, the complaint states, was that GE controlled the investment vehicles available to plan participants. By steering investments to its own proprietary funds, GE boosted the value of GEAM, and was able to sell GEAM for up to $485 million.
“These incentives tainted GE’s investment decisions,” the complaint states. “GE selected its proprietary funds not based on their merits as investments or because doing so was in the interest of the plan’s participants, but because these products provided significant revenues and profits to GE.”
The lawsuit seeks:
- A declaration that the defendants breached their fiduciary duty;
- Judgment that defendants are liable to make good on $700 million in losses from breach of fiduciary duty;
- An order that the defendants provide all accountings necessary to determine the repayment;
- Removal of fiduciaries who have breached their fiduciary duties;
- Reform of the plan to render it compliant with ERISA;
- Award of attorney’s fees, costs, any allowable interest payments and any other equitable or remedial relief the court deems appropriate.
Law firm Sanford Heisler Sharp is handling the case for the plaintiffs.
Charles Field, a lead attorney for the plaintiffs, said in the few days since the suit was filed, Sanford Heisler Sharp has heard from a lot of other people with investments through the fund.
“I’m surprised at the number of calls we’re getting from people all over the country,” he said.
Field added that it is not inherently bad to have employees invest in a fund operated by the company — such an arrangement can provide accessibility and accountability. But if it takes on such a role, the company has a fiduciary responsibility to do right by the investors, he said.
“When the performance becomes substandard, and it’s substandard year after year after year, you have to question whether you’re doing the right thing.”