Compliance October 8, 2019

CareerBuilder Faces 401(k) Excessive Fee Suit

The proposed class action lawsuit alleges plan fiduciaries allowed the plan’s recordkeepers and its investment adviser and/or trustee to receive excessive and unreasonable compensation.

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A participant in the CareerBuilder LLC 401(k) Plan has filed a proposed class action lawsuit alleging that plan fiduciaries allowed the plan’s recordkeepers, ADP and Empower, and its investment adviser and/or trustee, Morgan Stanley Smith Barney, to receive excessive and unreasonable compensation.

CareerBuilder has not yet responded to a request for comment.

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According to the complaint, the providers received excessive compensation through:

  • direct “hard dollar” fees paid by the plan to ADP and/or Morgan Stanley;
  • indirect “soft dollar” fees paid to ADP and/or Morgan Stanley by mutual funds added and maintained in the plan to generate fees to ADP and/or Morgan Stanley;
  • fees collected directly by ADP and/or Morgan Stanley from mutual funds added and maintained in the plan to generate fees to ADP and/or Morgan Stanley; and
  • float interest, access to a captive market for 401(k) rollover materials to plan participants, and other forms of indirect compensation.

The plaintiffs say that while the hard dollar fees appear modest or misstated, it must be the case that the vast majority of ADP’s and/or Morgan Stanley’s and possibly others’ compensation came in the form of revenue sharing.

The lawsuit says it is estimated that the plan overpaid for administrative and advisory services by at least $1.1 million from September 30, 2013, to 2017. “In addition, it is expected that a reviewof data from 2018 and forward, after discovery, will show additional excessive amounts paid for administrative and advisory services during these years until the present,” the complaint says.

In addition, the plaintiff alleges that in order to provide for these revenue streams, the defendants larded the plan with excessively expensive mutual funds—to the exclusion of superior alternatives—which in turn paid ADP and/or Morgan Stanley out of the excessive fees they collected from plan investments.

The plaintiff says these mutual funds collectively underperformed superior alternative funds for a variety of reasons, including the fact that the alternatives charged lower fees by, among other things, removing the additional payments to ADP and/or Morgan Stanley. In the complaint is a table that the plaintiff says shows nearly 80% of the investments listed paid fees that were well over 40% higher than they should have paid for the identical product.

“In addition, it is expected, once complete data is available, the numbers will show that revenue sharing on these funds were between 18% to over 30%. Revenue sharing at this level, shows a lack of any prudent process for monitoring these funds. Clearly, had there been a prudent monitoring process in place, the majority of these funds would have been replaced with less expensive alternatives as early as September 30, 2013,” the complaint says.
Compliance October 8, 2019

Lower Court Says 2nd Circuit Should Decide Regulation Best Interest Lawsuits

It is well-established that clauses containing a specific statutory grant of jurisdiction to the court of appeals should be construed in favor of review by the court of appeals.

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Due to a self-declared lack of subject matter jurisdiction, the U.S. District Court for the Southern District of New York has dismissed a consolidated lawsuit seeking to halt the implementation of the SEC’s Regulation Best Interest rulemaking package.

The ruling notes that motions have already been filed by the parties in the appropriate appellate court—in this case the 2nd U.S. Circuit Court of Appeals.

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Explaining its reasoning, the District Court notes that, “in the absence of a statute bestowing judicial review, the only federal court with jurisdiction to review an agency decision is the district court.” Here, however, the relevant statute (15 U.S.C. Section 78y.b.1) does “bestow” judicial review, by providing that an adversely-affected person “may obtain review” in the court of appeals for the circuit of residence, or in the United States Court of Appeals for the District of Columbia Circuit.”

“Although Congress’s use of the permissive ‘may’ might seem on its face to imply a non-exclusive grant of jurisdiction in the court of appeals, it is well-established that clauses containing a specific statutory grant of jurisdiction to the court of appeals should be construed in favor of review by the court of appeals,” the decision states.

Claims in the consolidated lawsuit, which includes as plaintiffs both private fiduciary advisers as well as a group of prominent State Attorneys General, suggest Reg BI fails to meet the clear demands established by Congress in the Dodd-Frank Act.

“One of the gaps that the Dodd-Frank Act sought to close concerned the standard of conduct applicable when individuals receive recommendations and advice on how to invest their money in markets,” the plaintiffs contend. “Investment advisers have traditionally been subject to a fiduciary standard, while brokers and dealers have not. Over time, the line between advisers and broker/dealers [B/Ds] has blurred, with an increasing number of broker/dealers performing many of the same services as investment advisers, without having to satisfy the same regulatory requirements in doing so.”

According to the plaintiffs, at first, the SEC heeded Congress’ mandate. Its staff studied the problem and prepared a report recommending the adoption of a universal standard of conduct, known as the “without regard to” standard.

“But last year, the SEC broke from Dodd-Frank’s requirements … by proposing a rule adopting neither a universal standard nor a ‘without regard to’ standard,” the plaintiffs allege. “Under the SEC’s so-called ‘best interest’ rule … a broker/dealer is permitted to take into account its own personal interests in providing recommendations and advice to investors on how to invest their life savings. This new rule means that broker/dealers may maintain harmful conflicts of interests while marketing themselves as trusted advisers acting in their client’s best interests.”

The full text of the New York District Court decision is available here.

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