A new lawsuit against PIMCO and its sister company Allianz Global Investors accuses the two firms of breaching their fiduciary duty by loading up their joint employee defined contribution plan with poor performing and overpriced investment options from the two managers.
The suit, filed in U.S. District Court in Santa Ana, Calif., puts Pacific Investment Management Co. in the news again, following last week's suit by PIMCO co-founder William Gross, who is seeking at least $200 million in damages over his claims that he was driven out of the firm by other executives seeking to capture some of his lucrative bonuses.
The latest lawsuit filed by two law firms, Kabateck Brown Kellner and Nichols Kaster, on behalf of a former PIMCO software engineer and another AllianzGI employee, is asking the court to grant class-action status to cover approximately 4,000 employees in the defined contribution plan.
The lawsuit maintains that participants end up paying more than 75% more in fees that the average U.S. 401(k) plan because they are given a choice of only PIMCO and Allianz funds.
Using 2013 year-end balances and taking into account all administrative and investment expenses, total plan costs were $5.95 million, equal to 0.77% of the $772 million in plan assets, the lawsuit says.
“This total plan cost of 0.77% is outrageously high for a defined contribution plan with over $500 million in assets,” the lawsuit says. “In 2013, the average total plan cost for plans with between $500 million and $1 billion in assets was 0.44%.”
The lawsuit says employees could have saved $2.5 million if lower cost options from other managers, including index funds, were included in their 401(k) plan offerings.
The lawsuit also claims that both Allianz and PIMCO used employee contributions to provide seed money for new untested mutual funds, and that a default investment option, the AllianzGI Global Allocation Fund, invested in a variety of other new and untested Allianz and PIMCO funds.
Petra Brandes, a spokeswoman for Allianz Asset Management, said in an e-mailed statement that the lawsuit was “without merit and we are confident it will be resolved accordingly. “Our 401(k) plan has been administered in accordance with applicable rules for the benefit of our participants.”
Both plaintiffs in the lawsuit are no longer employed by the money managers. Aleksandr Urakhchin worked as a software developer for PIMCO until the summer of 2015. Nathan Marfice worked for Allianz until 2013 and entered the plan in 2009. No information was given on Mr. Marice's title.
Also included in the lawsuit besides PIMCO and Allianz Global Investors is Allianz Asset Management of America, which runs the 401(k) plan.
In their complaint, the plaintiffs cited two high-profile Supreme Court decisions to support their claims. In a fee-related case, Tibble et al. vs. Edison International, the court ruled unanimously that plan sponsors have a “continuing duty” to monitor investments and to remove “imprudent” ones.
In a stock-drop case, Fifth Third Bancorp et al. vs. Dudenhoeffer et al., the court ruled unanimously in June 2014 to reject a “presumption of prudence” defense used by sponsors to justify keeping company stock in their plans even when the stock fell. Fiduciaries, the court said, should be treated with “the same duty of prudence that applies to ERISA fiduciaries in general.”
Robert Steyer contributed to this story.