Compliance June 26, 2020

Estee Lauder Faces 401(k) Plan Excessive Fee Lawsuit

The lawsuit argues that while the TDFs in the plan are CITs, they are private label CITs with much higher expense ratios than the typical CITs offered by JPMorgan.

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Former participants in the Estee Lauder Companies 401(k) Savings Plan have filed a proposed class action lawsuit alleging the company, its board of directors and the plan’s investment committee breached fiduciary duties under the Employee Retirement Income Security Act (ERISA) by failing to prevent the plan from paying lower investment and recordkeeping fees.

“As a large plan, the plan had substantial bargaining power regarding the fees and expenses that were charged against participants’ investments. Defendants, however, did not try to reduce the plan’s expenses or exercise appropriate judgment to scrutinize each investment option that was offered in the plan to ensure it was prudent,” the complaint states.

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The plaintiffs allege that from June 22, 2014, through the date of judgment, the defendants, as fiduciaries of the plan, breached their duties by failing to objectively and adequately review the plan’s investment portfolio with due care to ensure that each investment option was prudent, in terms of cost, and by maintaining certain funds in the plan despite the availability of identical or materially similar investment options with lower costs and/or better performance histories.

They say these breaches cost the plan and its participants millions of dollars.

Estee Lauder has not yet responded to a request for comment.

As is common in ERISA cases now, the complaint states that the plaintiffs did not have knowledge of all material facts necessary to understand that the defendants breached their fiduciary duties and engaged in other unlawful conduct in violation of ERISA until shortly before the suit was filed.

The lawsuit says the plan has retained several actively managed funds as investment options “despite the fact that these funds charged grossly excessive fees compared with comparable or superior alternatives, and despite ample evidence available to a reasonable fiduciary that these funds had become imprudent due to their higher costs relative to the same or similar investments available.” The complaint states that this decreased participant compounding returns and reduced the available amount participants will have at retirement.

The lawsuit notes that the majority of funds in the plan stayed relatively unchanged during the class period. And, in 2018, it says, nearly half of the funds in the plan were significantly more expensive than comparable funds found in similarly sized plans. The complaint includes a chart that shows the expense ratios for funds in the plan were, in some cases, up to 57% greater than the median expense ratios in the same category.

Between 2014 and 2018, the plan maintained between $489 million and $1.06 billion in JPMorgan collective investment trusts (CITs). In 2018, more than a billion dollars of plan assets were invested in private label collective trust target-date funds (TDFs) offered by JPMorgan. The complaint explains that CITs are less expensive than mutual funds; however, it says that while the TDFs in the plan are CITs, they are private label CITs with much higher expense ratios than the typical CITs offered by JPMorgan. “A clear indication of defendants’ lack of a prudent investment evaluation process was their failure to identify and select available lower cost collective trusts,” the complaint states.

The plaintiffs argue that, given that the lower-cost CITs were comprised of the same underlying investments as their mutual fund counterparts, and managed by the same investment manager, they would have had greater returns than the plan’s funds. In addition, they note that the plan did not receive any additional services or benefits based on its use of more expensive funds.

The lawsuit also alleges that the defendants failed to prudently manage and control the plan’s recordkeeping costs by failing to track the recordkeeper’s expenses; identify all fees, including direct compensation and revenue sharing; and perform a request for proposals (RFP) process at regular intervals. It notes that Alight has been the plan’s recordkeeper since at least 2014, and “there is no evidence defendants have undertaken an RFP since 2014 in order to compare Alight’s costs with those of others in the marketplace.” The complaint says that “by any measure,” Alight’s direct compensation for recordkeeping services has been unreasonable.

Compliance June 25, 2020

DOL Files Brief in Case Over ERISA Preemption of CalSavers

A brief filed in a federal appellate court explains how the agency believes a federal district court erred in dismissing the case.

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In an ongoing legislative battle over the legality of the California Secure Choice Act, which led to the establishment of a state-run automatic individual retirement account (IRA) program, attorneys for the U.S. Department of Labor (DOL) have filed a brief explaining how it believes a federal district court got it wrong.

The complaint was originally filed in 2018 by the Howard Jarvis Taxpayers Association and alleged the act that created the California Secure Choice program, now known as CalSavers, “violates the Supremacy Clause of the United States Constitution because it is expressly pre-empted by the Employee Retirement Income Security Act [ERISA] of 1974.” The case was dismissed in March with the court finding no impermissible reference to or connection with ERISA plans in the statute.

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In its brief filed with the 9th U.S. Circuit Court of Appeals, the DOL notes that the act establishes a trust with IRAs for employees and a governing board that invests the trust’s assets. It requires certain employers that do not otherwise offer a retirement plan or automatic enrollment IRA to “have a payroll deposit retirement savings arrangement” for employees to participate in CalSavers. The arrangement must have automatic enrollment, though employees may opt out.

To comply with the act, employers either must have an ERISA-covered retirement plan or must use the CalSavers withholding arrangement. The DOL argues that if employers use the withholding arrangements mandated by the act, they establish or maintain plans, funds or programs of benefits for their employees, which therefore are themselves ERISA-covered plans. “The fact that the withholding arrangements are compelled by state law does not alter the ERISA pre-emption analysis,” the brief states.

The DOL argues that the law establishing CalSavers is pre-empted under the legal doctrine that state law relates to an ERISA plan if it has a connection with or reference to such plans. The agency says this is because it both governs a central matter of plan administration and interferes with nationally uniform plan administration—by subjecting multi-state employers to a patchwork of state laws that directly regulate how employers must structure their program or plan in providing retirement benefits.

According to the DOL’s brief, the arrangements mandated by the act meet the test set forth in Donovan v. Dillingham to determine whether a plan, fund or program exists. These include:

  • The “intended benefits” are the retirement income from tax-deferred contributions provided by the IRAs required by the act;
  • the “beneficiaries” are the employees whose wages are withheld;
  • the “source of financing” is the automatic payroll deductions; and
  • the “procedures for receiving benefits” are those provided through the IRA product.

Once it is determined that the act’s mandated withholding arrangements are plans, funds or programs of benefits, the DOL says, it is necessary to determine next whether they are established or maintained by employers. Citing Advocate Health Care Network v. Stapleton and Donovan, the brief states, “Establishment of a plan … is a one-time, historical event,” that results in “a reasonable person [being able to] ascertain the intended benefits, a class of beneficiaries, the source of financing and procedures for receiving benefits.” The agency points out that the arrangements would be ERISA-covered plans if the employers had voluntarily set up identical IRA arrangements for their employees and hired CalSavers to manage those investments. “The Supreme Court has held that a plan otherwise covered by ERISA does not escape pre-emption purely because state law mandated its existence. Thus, the identical state-mandated plan is treated as equivalent to plans established by employers and subject to ERISA,” it says.

The DOL further argues that the act’s mandated withholding arrangements are ERISA-covered plans because the covered employers “maintain” them in a manner sufficient for ERISA coverage. The statute and its regulations define the employer’s administrative responsibilities—requiring that employers continually update their payroll deductions to reflect changes to their workforce of eligible employees, their employer eligibility and the fluctuating contribution rate for each employee.

The DOL says courts recognize that when a state law requires such ongoing eligibility determinations in combination with an ongoing administrative scheme, then the employer’s required activities will be sufficient to establish or maintain an ERISA-covered plan. “By requiring employers to deduct contributions from eligible employees’ wages on an ongoing basis, and to forward the contributions for deposit into IRAs established for each enrolled employee, the Secure Choice Act requires the employers to maintain an employer-based program providing ‘retirement income to employees’ or resulting ‘in a deferral of income by employees for periods extending to the termination of covered employment or beyond,’” the brief states.

The DOL says the district court was correct in rejecting the argument that CalSavers can avoid pre-emption because the withholding arrangements avoid ERISA coverage under the DOL’s safe harbor regulation. The district court found that because employees are automatically enrolled in the program, the arrangements are not “completely voluntary” as required by the safe harbor.

The safe harbor regulation provides that ERISA does not cover a payroll-deduction IRA arrangement otherwise covered by ERISA so long as certain conditions are met, including:

  • the employer makes no contributions;
  • employee participation is “completely voluntary”;
  • the employer does not endorse the program and acts as a mere facilitator of a relationship between the IRA vendor and employees; and
  • the employer receives no consideration except for its own expenses.

The brief notes that prior courts have held that opt-out arrangements are not “completely voluntary.” “To further ERISA’s protections of participant choice, the safe harbor requires a ‘completely voluntary’ rather than a merely ‘voluntary’ choice, and this heightened protection bars opt-out regimes, like CalSavers, from the department’s safe harbor regulation,” the brief states.

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