Workers allege Principal Financial ran $4.59B 401(k) as a fee machine

A class action filed September 22 in Chicago federal court alleges that Principal Financial Group turned its own employees' retirement plan into a revenue stream for the company.

The lawsuit, filed in the US District Court for the Northern District of Illinois (Case No. 1:26-cv-11597), targets Principal Financial Group, Inc., its subsidiary Principal Life Insurance Company, and two internal oversight bodies - the Benefit Plans Investment Committee and the Benefit Plans Administration Committee. Two plan participants brought the case on behalf of current and former members of the Principal Select Savings Plan, a 401(k) that held approximately $4.59 billion in assets and covered 17,454 participants and beneficiaries as of December 31, 2024, according to the complaint.

The central allegation: Principal filled the Plan's investment menu "almost exclusively" with its own branded funds, and the committees responsible for those choices were "not independent of Principal" - staffed by company managers whose salaries and bonuses come from Principal itself.

The complaint lays out several ways this arrangement allegedly cost participants.

First, five separate account funds in the Plan listed Principal Life as the investment manager, but outside subadvisors handled the actual day-to-day portfolio management, according to the filing. The complaint alleges the Plan "could go straight to the instant subadvisor for the same service, cutting out Principal Life as a middleman," and pay less, "with millions of dollars of annual savings." Instead, the filing states, Principal Life collected what the complaint calls a "retained investment management fee" - keeping between roughly 19% and 37.5% of the total management fee depending on the fund.

Second, the complaint targets Principal's suite of target date funds. These funds held 60% to 70% of their assets - "at all times over $1 billion," according to the filing - in proprietary Principal index funds. The complaint alleges those index funds consistently trailed competing products from BlackRock, Northern Trust, State Street, and Vanguard across multiple asset classes from 2018 through 2024.

The numbers in the filing are pointed. On Principal's S&P 500 index product, the complaint alleges fees were "between 4.33 to 6.5 times higher" than competitors, with tracking error - the measure of how closely a fund follows its benchmark - "between 5 to 10 times worse." For Principal's bond index product, the complaint alleges fees ran two to 3.5 times higher and tracking error was five to six times worse than alternatives.

The complaint highlights a 2013 decision as a particularly telling example. That year, according to the filing, Principal swapped out a BNY Mellon bond index collective investment trust for a Principal-branded bond index fund - even though BNY Mellon managed both products. The Principal version "charged fees that were 2.5 times higher than the BNY Mellon option," the complaint states, adding that "there does not appear to be any justification for this change other than to increase the fee revenue received by Defendants."

The filing also alleges the defendants repeatedly chose more expensive share classes and fund vehicles when identical lower-cost versions were available within Principal's own product lineup. In one instance, the complaint states the target date funds used a mutual fund version of an international equity fund when an annuity separate account version of the same investment carried fees "over 45% lower."

A separate claim focuses on the Principal LargeCap Growth I Separate Account, which the complaint says trailed its own benchmark - the Russell 1000 Growth Index - across every reported performance period. Citing a July 2, 2026, Morningstar analyst report, the complaint states the fund finished "in the large-growth Morningstar Category's bottom quartile" for 2025 and used an "untested way to manage risks." Morningstar rated the fund "Below Average" on both risk and return, according to the complaint.

The complaint brings two claims under the Employee Retirement Income Security Act: one for prohibited self-dealing transactions and another for breach of fiduciary duties of loyalty and prudence. The plaintiffs seek class certification covering all Plan participants and beneficiaries from September 18, 2020, onward, along with restoration of Plan losses, return of profits, and attorneys' fees.

These allegations have not been tested in court, and no court has ruled on the merits of the claims.