DOL Sues City National for Profit Sharing Plan Practices

A lawsuit filed by the Labor Department alleges excessive fees were charged to participants in the City National Corp. Profit Sharing Plan, leading to a breach of federal law and the Employee Retirement Income Security Act.

The Department of Labor (DOL) says the fiduciaries of the City National Corp. Profit Sharing Plan caused the plan to lose more than $4 million—while at the same time the fiduciaries engaged in self-dealing and conflicted transactions that enriched themselves and their employer. According to a complaint filed in the U.S. District Court for the Central District of California Western Division, the self-dealing and conflicted transactions involving plan assets resulted in excessive fees going to City National Bank and its affiliates.

Defendants named in the suit include City National Bank and a number of executives in human resources, compliance and senior management. Crisanta Johnson, the Los Angeles regional director for the Employee Benefits Security Administration (EBSA), says the case is significant because “we have a financial institution reaping excessive profits from the plan that its employees participate in.”

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“All of this could have been avoided if the fiduciaries had simply reimbursed themselves in accordance with the law,” she notes. “Instead, they created a payment scheme that drained plan assets.”

Johnson says an EBSA investigation found that, through the end of 2011, “plan fiduciaries and affiliates received millions of dollars in compensation, commissions and fees at the expense of the plan. Rather than outsource plan services to avoid potential conflicts of interest, or reimburse themselves for only direct expenses, City National Bank and other fiduciaries established compensation rates for the plan on par with those charged to the bank’s retail clients. By doing so, they created conflicts that resulted in multiple breaches of the Employee Retirement Income Security Act.”

DOL alleges the compensation issues were compounded because City National Bank employees were not required to track the amount of time they spent working on plan issues. This allowed large and unreasonable fees to be charged to the plan, according to the complaint. Proper tracking and monitoring of expenses could have prevented this and limited plan expenses, Johnson adds.

The investigation was conducted by the Los Angeles Regional Office of the Employee Benefits Security Administration, and the case is being litigated by the department’s Regional Office of the Solicitor in San Francisco.

Fidelity Reports Record High Retirement Plan Balances

Fidelity’s first-quarter 2015 update shows retirement plan participant accounts earned marginal growth in the first three months of the year—just enough to set new record account balances.

More than one million people increased savings rates within retirement plans and individual retirement accounts (IRAs) administered by Fidelity during the first quarter of 2015, the firm says.

The average 401(k) balance grew to $91,800 at the close of the first quarter, meaning the average balance is up about 50 basis points from last quarter and up 3.6% from one year ago. Fidelity explains that 23% of U.S. employees contributing to retirement plans in the Fidelity system have increased their contribution rates since Q1 2014, also a record.  

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“How much an individual contributes to their retirement savings is one of the most critical factors in retirement readiness,” notes Jim MacDonald, president of workplace investing at Fidelity Investments. “Contributions to retirement savings accounts have increased across the board, including IRAs, small business plans and traditional 401(k) accounts. We’re very encouraged by this trend and hope to see it continue, considering that any increase in savings can have a positive impact on long-term retirement success.”

The average overall savings rate, which includes both employee and employer contributions, increased to 12.5% during the quarter, Fidelity’s update shows. At the same time, the employee contribution rate remained constant, at 8.1%, while the employer contribution rate climbed to 4.4%.

Meghan Murphy, a director of thought leadership at Fidelity Investments, tells PLANADVISER that the slowly increasing prevalence of automatic enrollment—used by 27.9% of sponsors running plans that cover more than 60% of all participants—is partly responsible for preventing the average employee contribution rate from climbing at a time when many participants are in fact driving significantly more of their dollars into retirement accounts.

“Many new participants are being swept into the defined contribution system at rates that are somewhat lower than the current average employee contribution,” she explains, “This lead to the average employee contribution staying flat during the first quarter of 2015, despite the fact that more than a million people decided to increase their contributions, with an average in the range of 3% or even higher among different demographic groups.”

In that sense the level employee contribution rate can be interpreted as a positive—it means more people are joining the DC retirement system, while those at the top end of the contribution scale continue to push the envelope. Murphy adds that the current state of affairs will also give the industry a great test of the efficacy of automatic deferral escalation provisions—she predicts those plans with auto-escalation (13% of the sample) will continue to outperform their peers that lack the key feature.

Fidelity finds nearly one-third (27.9%) of all 401(k) plans now automatically enroll new workers as of Q1 2015, up 2% from one year ago. Still only about half as many employers (13%) automatically increase employees’ contribution rate each year.

Not surprisingly, the quarterly snapshot shows employees with 10 years or more of active tenure in a 401(k) plan have achieved greater balances—with an average account value of $251,600. This represents a 12% year-over-year gain, Fidelity says. Also favorable, the percentage of employees with an outstanding 401(k) loan dropped to 21.8%, the lowest level in five years.

Fidelity notes the average IRA balance at the end of Q1 was $94,100, a record high and up 5% over last quarter. While the average IRA contribution in Q1 was $3,150, a slight drop from the Q1 2014 average contribution of $3,270, Fidelity finds the overall percentage of investors making a contribution to their IRA in Q1 2015 was actually 7% higher than in Q1 2014, and among investors under age 35 the increase was 26% year-over-year.

For investors using both an IRA and a 401(k), the net balance increased 2.2% year-over-year to reach $267,200—while the average combined contribution increased slightly from $11,200 to $11,300.

For self-employed 401(k) accounts, the average balance at the end of 2014 was $144,100, Fidelity says, for a 39% increase since 2007. The average contribution was $22,400 at the end of 2014, a 29% increase since 2007. For SEP IRAs, the average balance at the end of 2014 was $89,800, a 48% increase since 2007. The average contribution for 2014 was $14,000, a 20% increase since 2007. For SIMPLE IRAs, the average balance at the end of 2014 was $37,700, a 54% increase since 2007. The average contribution for 2014 was $6,260, an 8% increase since 2007.

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