Suit Says Matrix Mishandled Fees

An employer, its two plans, and the plan trustee have—together—filed suit against Matrix Trust, alleging that it not only failed to disclose certain fees, but that the custodian held on to them.

The class action suit was filed by MBA Engineering, Inc., as Sponsor and Administrator of the MBA Engineering, Inc. Employees 401(k) Plan and the MBA Engineering, Inc. Cash Balance Plan, and Craig Meidinger, as Trustee of the MBA Engineering, Inc. Employees 401(k) Plan and the MBA Engineering, Inc. Cash Balance Plan (he also happens to be the owner of MBA)—and it names six separate classes that it purports to represent (more on that in a minute).

The suit (MBA Eng’g, Inc. v. Matrix Tr. Co., N.D. Tex., No. 3:20-cv-01915, complaint 7/21/20) claims that the “key wrongdoings” stem from the defendants’ (Matrix Trust Company and Matrix Settlement and Clearance Services, LLC) “…failure to disclose that their Customers’ assets were earning non-float cash interest, earning float cash interest, whether or how much they were earning 12b-1 fees, and that Defendants kept that money as compensation.” They argue alternatively that the defendants “failed to disclose that they paid portions of the Funds to third parties or parties in interest” (well, at least if discovery later shows they made such payments), and that the defendants “failed to disclose all the foregoing in violation of multiple duties under ERISA and other laws.”

This while, during the last six years, “Defendants experienced rapid growth,” the suit explains, going on to explain that from 2014 to 2017, defendants “grew their business by more than 400% in customer assets to almost $200 billion.” However, it goes on to explain that, “during this time of rapid and expansive growth, Defendants neglected multiple regulatory requirements imposed by ERISA and the U.S. Department of Labor (“DOL”) which impose strict liability.”

Now, as it turns out, this isn’t the first time that MBA has filed suit against Matrix, alleging that the custodian was complicit in the embezzlement of some $2.5 million.[1] There (the suit is still active), MBA had alleged that Matrix was a “functional fiduciary” despite its role as a custodian. 

Scope of Suit

Should the suit be determined to have merit, its scope is large; the suit notes that, “as of this date, Defendants have retained, without satisfying strict disclosure obligations, three categories of monies: 12b-1 fees, non-float cash interest, and float cash interest (collectively, the “Funds”). Defendants retained Funds in each of these categories from large portions of (if not all) Customer assets which averaged roughly over $126 billion, in total, over the last six years.”

The suit criticizes Matrix’s custodial account agreement for not providing 408(b)(2) notices for the funds, and says that it not only “does not mention 12b-1 fees whatsoever among its compensation terms,” but also that Matrix “…never provided supplemental disclosures to their Customers regarding 12b-1 fees.”

Instead, the plaintiffs claim that Matrix employed an “atypical and error-prone 408(b)(2) approach”—which apparently means that Matrix relied on third-party administrators to provide those notices. 

“Plaintiffs are already aware of over 100 of Defendants’ customers who never received 408(b)(2) notices from Defendants concerning 12b-1 fees or the other Funds at issue,” according to the suit. The suit claims that the plaintiffs here “were falsely told by third parties that 90% of the 12b-1 fees Defendants would receive would be paid to the Plaintiffs. However, records now show that did not happen.” What has happened with those 12b-1 fees isn’t clear to the plaintiffs, however, indicating that “discovery will reveal what Defendants did with the 12b-1 fees,” but whether they kept it or distributed it to other parties, the plaintiffs see either outcome as a prohibited transaction. “Plaintiff is further informed and believes and, based thereon, alleges that many thousands more prohibited transactions exist by virtue of Defendants’ error-prone and legally insufficient 408(b)(2) compliance approach,” the suit continues.

The suit also takes issue with the practices it alleges with regard to cash interest generated in the accounts held at Matrix. “As the custodian, Defendants would hold cash for their Customers in two circumstances. The cash would be in either a ‘float’ or ‘non-float’ state. For either situation, Defendants assert in their custodial agreement that all interest earned by each Customer’s assets will be applied to the Customer accounts. But this was false.” The suit alleges that “Defendants also kept all interest their Customers’ cash earned. Defendants’ form custodial agreement is completely silent on this form of compensation. Defendants also did not disclose the interest earned by their customer’s cash anywhere else.”

This, they claim was in contrast to the custodial account statements, which the suit says “portrayed a deceptive picture that their Customers’ cash did not earn any interest,” when in actuality they allege, “Defendants’ Customers earned interest on their cash, and Defendants wrongfully kept it for themselves.”

Suit Scope

As for the scope of the suit—well, the plaintiffs note that the defendants act as the custodian and affiliated service provider for over roughly 60,000 Customer benefit plans, “all of whom could bring claims for these violations,” and that since “joining each plan and each participant is impractical and a waste of judicial resources,” they propose to file a class action on behalf of those parties.

Oh, but this class action is said to contain six classes: 

• ERISA 12b-1 Class: All of Defendants’ Customers which were ERISA qualified plans whose assets generated 12b-1 fees that Defendants retained
• Non-ERISA 12b-1 Class: All of Defendants’ Customers which were not ERISA qualified plans whose assets generated 12b-1 fees that Defendants retained
• ERISA Non-Float Class: All of Defendants’ Customers which were ERISA qualified plans whose cash assets generated interest when not in a float status that Defendants retained
• Non-ERISA Non-Float Class: All of Defendants’ Customers which were not ERISA qualified plans whose cash assets generated interest when not in a float status that Defendants retained
• ERISA Float Class: All of Defendants’ Customers that were ERISA qualified plans whose cash assets generated interest when in a float status that Defendants retained
• Non-ERISA Float Class: All of Defendants’ customers that were not ERISA qualified plans whose cash assets generated interest when in a float status that Defendants retained

In response to an inquiry regarding the suit, a Matrix spokesperson responded: “Matrix Trust and its affiliates have provided technology-based solutions to the bank trust and retirement industry with the highest integrity for over 20 years. Matrix vehemently rejects these baseless and unsubstantiated allegations made by MBA Engineering. We have always acted in a manner consistent with our contractual obligations and in full compliance with the law. We will defend ourselves vigorously against the meritless charges and look forward to prevailing in this lawsuit.”

NOTE: In litigation there are always (at least) two sides to every story. However factual it may turn out to be, the initial lawsuit in any action is only one side, and one generally crafted toward a particular result. In our coverage you'll see descriptions of events qualified with statements such as “the suit says,” or “the plaintiffs allege”—and qualifiers should serve as a reminder of that reality.

Footnote

[1] MBA Engineering Inc. in December 2017 accused Vantage Benefits Administrators, Inc., Vantage CEO Jeffrey A. Richie and Vantage CFO Wendy K. Richie of stealing approximately $2,269,653.43 from the company’s retirement plans between June 3, 2016 and June 7, 2017. The MBA suit outlined a scheme whereby Vantage directed Matrix Trust Company to make a series of transfers from the plan trust accounts to an account maintained by Vantage at Bank of America “without any authorization or direction from MBA, as the plan sponsor and the plan administrator.” MBA added Matrix Trust as a party to the suit in March 2018.