Neuberger Berman Fights Back Against 401(k) Lawsuit

The New York money manager wants a suit filed by a former employee over funds offered by the firm’s retirement plan to be dismissed.


Michael Nagle

Some large employers are facing lawsuits over the funds they offer to employees in their retirement programs, and a handful of employers have chosen to settle the claims. Neuberger Berman is not one of them.

Neuberger, a privately held, $246 billion money manager serving institutional and retail investors, is fighting back against a suit filed by a former employee who contends that one fund in the New York firm’s 401(k) plan for employees violated self-dealing provisions in pension law. The fund in question, the Value Equity Fund, was managed as a separate account by Neuberger on behalf of employees in its retirement plan. Attorneys for the plaintiff, Arthur Bekker, claim Neuberger breached its duty as a fiduciary — which requires plan sponsors to act in the best interest of participants under the Employee Retirement Income Security Act, the federal pension law enacted in 1974 — by offering employees a fund that was managed in-house when an externally managed index fund tracking the Standard & Poor’s 500 index would have generated better returns than VEF, with lower fees.

The case is the latest in a string of suits against money management firms for putting their own funds into employee 401(k)s. It also could serve as a watershed for employers facing similar actions from employees dissatisfied with the performance and costs of funds in their retirement plans. The lawsuits come at a time when investors, angered by the higher costs of actively managed funds, are fleeing to low-cost index funds in record numbers.

Bekker had invested in VEF when it was available in a plan that preceded Neuberger’s current 401(k). The fund was closed to new investments in 2003, when Lehman Brothers bought Neuberger, and investors’ holdings were transferred to Lehman’s retirement plan.

In a brief filed on October 3, lawyers for Neuberger argued that Bekker’s case should be dismissed on the grounds that, among other things, there is no basis for alleging that the firm breached its fiduciary duty based on fees or performance.

“Bekker has not even established that VEF’s fees were excessive, or its performance poor, because he improperly compares VEF to a passive index fund with a completely different objective and investment style,” states the brief. The lawyers claim that Bekker’s investment in VEF actually outperformed the S&P 500 index.

Neuberger says too that Bekker had several other investment options to choose from, including actively managed products and target-date funds from managers not affiliated with Neuberger, as well as index funds. Neuberger also allows its employees to use a brokerage account to select among thousands of other funds.

The firm’s lawyers further argue that it is not a breach of fiduciary duty for plan sponsors that manage investment funds to offer these funds to their own employees via their retirement plans, saying that Congress ruled that these so-called proprietary fund investments can be included in such plans.

Neuberger is attempting to dismiss the case at the same time that two universities are confronting similar lawsuits. The Massachusetts Institute of Technology and Duke University are fighting suits that contend their retirement plans charged excessive fees and violated their duty as fiduciaries.

Many asset managers and consultants are surprised that Neuberger, MIT and Duke are challenging the cases. Faced with similar lawsuits, for instance, Lockheed Martin Corp. and Boeing Co. chose to settle. To protect themselves against such claims, many employers are increasingly opting to offer low-cost index funds that strive to match market returns and are reducing the number of actively managed fund options, reasoning that indexing is a safe choice that can’t be criticized and won’t invite lawsuits.

Neuberger has declined to comment beyond its October 3 brief and a statement issued when news of the original suit broke in August. “The complaint compares fees on our active fund with a passive index option that is also included in our plan,” the firm said at that time. “We offer participants many options — active and passive, in-house and competitor — each at an appropriate fee level. The implied argument in the complaint that active and passive fees should be identical is nonsensical.” Bailey and Glasser, the law firm representing Bekker in the Neuberger case, did not respond to a request for comment in time for publication.

In any case, employers will be watching the case closely to see if a well-designed plan can incorporate actively managed funds — or whether the only truly lawyer-proof plan is one centered around index funds.