A class action filed September 22 in the U.S. District Court for the Northern District of Illinois (Case No. 1:26-cv-11597) accuses Principal Financial Group and its subsidiary Principal Life Insurance Company of running the company's own 401(k) plan as a profit center. The suit, brought by two participants on behalf of all current and former members of the Principal Select Savings Plan, alleges the plan's $4.59 billion in assets and 17,454 participants were saddled with proprietary funds that charged excessive fees and delivered subpar returns.
The complaint targets not only the corporate entities but also the Benefit Plans Investment Committee and the Benefit Plans Administration Committee, which it says were packed with Principal managers whose compensation depended on the company's bottom line. That structure, the plaintiffs argue, created a conflict of interest that led the committees to fill the investment menu "almost exclusively" with Principal-branded funds rather than seeking the best options for participants.
One of the core allegations involves five separate account funds where Principal Life was listed as the investment manager, but outside subadvisors actually handled day-to-day portfolio management. The complaint contends the plan could have hired those subadvisors directly, eliminating Principal Life as a middleman and saving "millions of dollars annually." Instead, Principal Life retained what the filing calls a "retained investment management fee," keeping between roughly 19% and 37.5% of the total management fee depending on the fund.
The suit also takes aim at Principal's target date funds, which held 60% to 70% of their assets—"at all times over $1 billion"—in proprietary Principal index funds. According to the complaint, those index funds consistently trailed comparable products from BlackRock, Northern Trust, State Street, and Vanguard across multiple asset classes from 2018 through 2024. The fee and tracking error gaps were stark: on Principal's S&P 500 index product, fees were "between 4.33 to 6.5 times higher" than competitors, and tracking error was "between 5 to 10 times worse." For the bond index product, fees ran two to 3.5 times higher and tracking error was five to six times worse.
A particularly telling example cited in the filing is a 2013 decision to swap 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 plaintiffs also allege the defendants repeatedly chose more expensive share classes and fund vehicles when identical lower-cost versions were available within Principal's own lineup. In one instance, 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 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.
The lawsuit 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. The case adds to a growing body of litigation challenging the use of proprietary funds in retirement plans, a topic that has drawn increased scrutiny from regulators and lawmakers. For advisors, the case underscores the importance of monitoring legislative changes that could affect plan fiduciary duties. It also highlights broader concerns about retirement savings challenges facing workers, and the potential impact of equity compensation on retirement security.
