An excessive fee suit filed by a litigator new to the ERISA space makes a series of new, sweeping allegations (including the plan’s advisor and auditor) alongside some familiar challenges.
Indeed the plaintiffs’ arguments—if as yet unproven—are extraordinarily detailed, and tread ground(s) not often seen in these type filings. They are represented by Fitzgerald Litigation, which, according to Bloomberg Law, is a three-attorney firm in Winston-Salem, N.C., that focuses on general civil litigation and estate planning, and that the firm filed a similar suit challenging the retirement plan of Shoe Show Inc. last fall.
The suit (Johnson v. Carolina Motor Club, Inc., W.D.N.C., No. 3:21-cv-00319, complaint 7/6/21)—filed by two former AAA Carolinas employees (Wes Johnson and Tamekia Bottoms)—claim their retirement plan is plagued by “extremely expensive, often underperforming” investment options and excessive administrative fees. Indeed, while at a high level the charges are relatively familiar, the suit covers some new ground(s), and, in the course of the 81-page filing makes some interesting allegations.
Those high-level claims? That the defendants “did not act reasonably and consistently with ERISA’s provisions, costing Plan participants and beneficiaries millions of dollars, by: (1) breaching multiple fiduciary duties owed to Plan participants, broadly expressed as incurring excessive fees that were paid by AAA’s employees who participated in the Plan; (2) failing to diversify (an independent basis of liability, separate from a breach of the general duty of prudence imposed on trustees); (3) engaging in prohibited transactions with parties in interest; and (4) failing to monitor co-fiduciaries.”
Optic ‘Cull’
Now, a plan merger played into the allegations here, via what the suit says was “a unique optic,” in that when AAA Carolinas merged into another company (1/4/21), the two companies’ plans merged. At that moment, even though the acquiring company (Auto Club Group) had a plan about 15 times larger, it had lower administrative costs than AAA Carolina’s plan.
The suit begins by noting that the defendants “chose to accept the benefits of federal and state tax deferrals for their employees via a 401(k) plan, and the owners and executives of Defendant organizations have benefitted financially for years from the same tax benefits”—but “have not followed ERISA’s standard of care.” The suit claims to have been “…filed after careful consultation with experts and publicly available documents to return benefits taken from Plan participants by Defendants.”
‘Party’ Lines?
The suit also takes pains to point out that “there exist a number of parties who are non-named Defendants, but who are nonetheless relevant to the facts of this case and may have information in their control and possession”—specifically Capfinancial Partners, LLC d/b/a/ Captrust Financial Advisors (“Captrust”) as a covered service provider (“CSP”) investment advisor, Wells Fargo (“Wells Fargo”) as both a recordkeeper (“Wells Fargo (recordkeeper)”) and an investment advisor (“Wells Fargo (advisor)”), and Cherry Bekaert (“Cherry Bekaert”) as an accounting firm performing audits.” While named (and said to be “relevant” and “likely to have information relevant to these claims,” the parties “are not named as defendants because AAA Carolinas, ACG, and ACIA remain responsible for the overall selection and monitoring of all service providers and have full discretion and control over Trust assets and Plan providers.”
The suit claims that “defendants refused to obtain cheaper funds for over a decade, aside from a small change in direction in or around 2018,” that they “never put the recordkeeping contract for the Plan up for a bid to bring in more competitive offers from other service providers,” and that they “allowed Captrust, Wells Fargo (recordkeeper), and Wells Fargo (advisor) to take large amounts of money from the Plan and its participants through excessive fees and compensation mechanisms, much higher than those warranted by the amount of work these service providers were completing.” They claim that “defendants continually imprudently limited their Plan participants’ investment choices to high-cost retail share classes, and when institutional shares were offered, they were the worst performing of the available options.”
Operation ‘Null’?’
They not only claim that the “defendants could easily have taken advantage of the free FundAnalyzer tool provided by the Financial Industry Regulatory Authority Corporation (FINRA)”—but that “defendants appear to have realized around this time that adding these JPMorgan funds as the default option in 2015 and seeding them with existing Trust assets was an imprudent mistake that cost millions of dollars,” and that “upon this realization, Defendants made a 180 degree turn from the selection/retention approach they had been following for the previous decade and made a wholesale swap of the JPMorgan funds for an American Funds’ target date series class R6.” But they then assert that, “realizing their mistake and adjusting investments, Defendants did nothing to appropriately conform to the IRS’ rules regarding the repair of former participants’ accounts that had been harmed over the prior 4 years”—and that the value of these accounts that had previously cashed out of the more imprudent funds amounted to $36,278,962.
In essence, the plaintiffs here allege that this amounted to an operational error that required the remedy of an IRS correction program!
“One can assume that Defendants retained funds with these excessive investment fees in order to require participants to pay recordkeeping and advising costs so that Defendants would receive reduced bills and invoices to pay themselves,” they assert. An action that “would clearly not be ‘solely and exclusively’ for the benefit of Plan participants, in violation of ERISA.” They also put a dollar figure to the issue, claiming that a “combined reduction of 2%, off of an expected return of 5%, represents a 40% loss of earnings year after year due to these duty-violating decisions. This flawed fund selection and monitoring process cost 4x the revenue sharing costs overall, or an estimated $8 million over the last 5 years, and over $20 million since 2009.”
The suit also takes aim at the fees paid to Captrust, citing data from the plan’s Form 5500 filing, relying on Fi360’s Fee Benchmarker (6th edition) noting that in 2009 Captrust was paid $11,055 in its first year, but that 2014, hired to serve as a fiduciary and to assist Defendants in selecting and monitoring Trust investments (and while arguably a different level of service, this is not mentioned), that Captrust’s compensation had increased by a staggering $285,593 for a total pay of $296,648. This, the suit alleges, amounted to excess compensation that they say “must be restored under the IRS’ Restorative Payment process, and IRS Form 5500 instructs that applicable 15% and 100% excise taxes must be paid to the IRS.” Indeed, “rounding up to $20,000 for simplicity reveals that Captrust owes about $275,000 to the Plan and Trust in restorative payments for this overpayment, plus earnings since 2014,” the suit alleges.
And, were that not enough, the suit points out that “plan officials like Carmen Mabe, Christina Johnson, and Colin Campbell all certified for the years 2009 to 2019, under penalty of perjury, that there were no non-exempt transactions with a party-in-interest or no excessive payments to providers of Plan and Trust services. This certification is in direct contradiction of the data provided above.”
H&R ‘Block’
Not surprisingly, the suit takes issue with asset-based fees for recordkeeping services (citing the example of H&R Block, which “charges taxpayers the same fee regardless of the amount of each taxpayer’s income so long as they have the same federal tax form to complete and file”). They note that “…the Plan grew by approximately 15% per year, meaning the Plan’s recordkeeper was being paid essentially an extra 15% each year based on additional contributions being made into the Plan funds, when the actual cost of recordkeeping was not becoming anywhere near 15% more expensive per year.” They then note that when you “compound this pattern across a suite of different investments, nearly 2,000 employees, and a decade of time and CSP pay grows quickly without providing any additional service to the Plan or participants, in violation of ERISA’s necessary and reasonable requirement to avoid prohibited transactions.”
Audit ‘Err’?
After citing some particulars, the suit states that “one might believe that discrepancies and violations so blatant must have been sniffed out by the Plan’s auditor, however this belief would be mistaken.” They point again to Cherry Bekaert, the “independent auditor of the Plan since at least 2009,” stating that “If Cherry Bekaert had spent even a small amount of time auditing the financial and operations information of Defendants, they would have discovered, among other violations, potential CSP overpayment from the Trust to Captrust in 2014, varied direct Trust payments to Wells Fargo (recordkeeper), and extremely high administrative expenses relative to their other clients.”
That said, they appear willing to give her the benefit of the doubt, noting that she “was only allowed by Defendants to perform limited scope audits from 2009 to 2019 and was never once allowed to complete a full scope independent audit of the Plan,” that she “appears more than capable of performing an adequate, intelligent audit of an ERISA plan. Therefore, one can only think the reason this was not done was that either Cherry Bekaert employees were pressured by Plan officials to alter the records, or, that Cherry Bekaert was not given enough access and information to complete an accurate full analysis.”
Diversity Exclusion?
The suit also challenges the diversification of investment options in the plan, not only that “the JPMorgan target-date portfolios discussed in the previous section were conflicted, expensive, and poorly performing,” but that “of the 14 non-target-date investment options available to Plan participants, 12 of them were considered highly correlated equity funds,” and that “having such a high proportion of the funds of this type so tightly correlated means the participants would be forced to shoulder the burden of widespread stock market losses that typically occur every seven to ten years.”
And while the basis of much of the issues raised appears to lie with the original AAA plan, the suit states that “to the extent that ACG acquired a flawed plan from AAA, they nonetheless had a duty to correct their predecessors’ mistakes,” and that “the discrepancies on AAA’s side of this merger should have become very apparent after acquisition, especially since ACG and AAA are in similar lines of business, with similar missions, skills, and goals. This does nothing to discharge ACG of liability in this matter though.”
What This (May) Mean
As we try to point out in all such posts, 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.
That said, the detail—and relatively unique—allegations made here stand out. There are doubtless matters glossed over, another perspective not fully explained (it would be a rare filing were that not the case)—but this is no mere copycat filing.
- Log in to post comments