Investor Sues Prudential, Morningstar over Bad-Choice Retirement ‘Robo’
The wave of lawsuits alleging over-priced investment choices in employer retirement plan programs has extended to the creators of automated investing platforms offered by plan sponsors.
Michael Green, who works for pest control company Rollins Inc., claimed in a federal suit filed earlier this month that Morningstar Associates’ “Goalmaker” software marketed by Prudential Investment Management steers plan participants to expensive funds in violation of the Employee Retirement Income Security Act.
Goalmaker is an off-the-shelf asset allocation program that automatically directs accounts to retirement plan options based on investors’ age, income, savings rate and other data. Prudential Retirement Insurance and Annuity Co., one of the Pru entities named as a defendant, sells record-keeping and other services to Rollins and worked with Morningstar on modifying Goalmaker to develop model portfolios, according to the lawsuit.
“GoalMaker systematically influenced plaintiff and the plans to put their money into a variety of high-cost retirement funds that paid excessive fees to the Prudential Defendants,” the lawsuit that was filed on August 3 in federal court in the Northern District of Illinois asserts.
The lawsuit, which seeks certification on behalf of 10,000 Rollins plan participants with $500 million in assets, asserts that the software directed investors to funds that had revenue-sharing arrangements with Prudential. The lawsuit accuses Morningstar and Prudential of conspiracy, and is seeking punitive damages under a federal racketeering statute.
“We believe this suit and the allegations it makes are wholly without merit, and we intend to defend ourselves vigorously,” a Morningstar spokeswoman said in an emailed statement.
A spokesman at Prudential did not return a request for comment.
The GoalMaker software directed investments among seven of the 16 fund options in the Rollins plan in a process that, counter to Prudential’s claims, is “not unbiased,” the lawsuit said. It “entirely excluded” from its allocation Vanguard index funds, the least expensive options offered, it said.
The fund investment options GoalMaker chose in the Rollins plan are: American Funds EuroPacific Growth R4, Franklin Growth Adv, Goldman Sachs Mid Cap Value A, Metropolitan West Total Return Bond Fund, T. Rowe Price New Horizons, Vanguard Windsor II Admiral and Prudential Guaranteed Fund, according to the lawsuit.
The Goldman fund has an expense ratio of 1.16% and pays Prudential a 25 basis point revenue-sharing fee, the lawsuit said in one of numerous illustrations of the software’s alleged bias. The comparable Vanguard mid-cap fund on the plan menu had an expense ratio of 8 basis points and no revenue share, according to the suit.
Among the against plan sponsors and investment managers, the Rollins appears to be the first alleging bias by means of an automated asset-allocation platform, said Benjamin Edwards, an associate professor of law at the University of Nevada Las Vegas.
“What’s alleged in this complaint illustrates the worst fears that people have about automated investing advice,” he said
Prudential and Morningstar have marketed the Goalmaker software as a “paradigm change” in investing, according to the lawsuit.
Goalmaker is not a ‘robo’ advisor such as Betterment or Wealthfront, which work primarily with individual investors and typically use index funds and other passively managed investment choices with low expense ratios. However, its automated structure is likely to taint the broader robo bucket, said Edwards.
The Securities and Exchange Commission has included examination of robo advisers as a 2017 priority, and has published around the fiduciary obligations of firms offering robo models.
-Jed Horowitz contributed to this story.