How Bad Are These Funds? Their Employees Sue for Being Made to Own Them

Last Updated Oct 4, 2011 9:24 PM EDT

In the mutual fund industry, some funds are good, some funds are bad, and some funds are so bad that their employees sue for having to invest in them.

I kid you not.

Last week it was reported that a group of Ameriprise employees have filed a lawsuit against their employer for offering only Ameriprise funds in their 401(k) plan -- funds that were much more expensive than those offered by other fund managers.

In putting together a 401(k) plan employers are serving as fiduciaries, and as such are required to put their employees' interests first when deciding which funds will be included as investment alternatives.

A handful of lawsuits have been launched over the past few years by employees who allege that their employers have breached this duty by choosing funds for their 401(k) plans on the basis of factors other than what was in their employees' best interests. (Those factors most typically include which fund manager was offering the employer the best deal.)

But this is the first instance in which a mutual fund manager has been sued for offering their own funds to employees in the firm's retirement plan.

There's little denying that Ameriprise's funds -- which were offered under the RiverSource brand prior to being acquired by Columbia Management last year -- are expensive, lackluster performers, charging upwards of 0.70 percent more than equivalent Vanguard funds.

Further, the suit notes, the plan's participants weren't even offered the lowest-cost share class, paying instead 0.17 to 0.34 percent more to invest in a more costly class. These excessive fees, of course, went directly to Ameriprise's bottom line.

While it's fairly clear that Ameriprise's employees were ill-served by the choices they were offered in their retirement plan, the lawsuit highlights a rather odd fact of life that's extremely commonplace in the mutual fund industry: many mutual fund employees know very well just how lousy their firm's funds are.

I've personally had a number of conversations with people who work in the mutual fund industry who confess that they invest very little of their own money in their employer's funds. They know full well that some of their competitors' offerings are much better alternatives for their own hard-earned money, and won't let loyalty to their employer trump their own economic interests.

Disingenuous? Yes. A sad commentary on the information gap that individual investors face? Definitely.

I just hope that none of the Ameriprise employers who are suing turn out to be Ameriprise advisors who were pitching these same funds to their clients.

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  • Nathan Hale

    View all articles by Nathan Hale on CBS MoneyWatch »
    Nathan Hale has spent decades working in the financial services industry, during which he has researched and written extensively about personal investing, the mutual fund industry, and financial services. In this role, he uses a nom de plume because many of his opinions about the mutual fund industry and its practices would not endear him to its participants.

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