Compliance May 26, 2021

State Street Sees Self-Dealing Allegations in ERISA Lawsuit

Participants in the State Street Salary Savings Program say their employer has engaged in self-dealing within the retirement savings plans.

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A new Employee Retirement Income Security Act (ERISA) lawsuit has been filed in the U.S. District Court for the District of Massachusetts, wherein a proposed class of plaintiffs argues State Street Corp. has engaged in self-dealing within one of its own retirement savings programs for employees, the State Street Salary Savings Program.

“This case is about a company’s self-dealing at the expense of its own workers’ retirement savings,” the complaint states. “The defendants were required by [ERISA] to act solely in the interest of the plan’s participants and beneficiaries when making decisions with respect to selecting and monitoring the plan’s investments, and the fees and expenses associated with those investments. Rather than fulfilling these fiduciary duties by offering plaintiffs and the other investors in the plan only prudent investment options at reasonable cost, the defendants selected for the plan and repeatedly failed to remove or replace imprudent proprietary investment funds managed and offered by defendant State Street Corp. and/or its subsidiaries or affiliates.”

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The complaint alleges these funds were not selected and retained as the result of an impartial or prudent process, but were “instead selected and retained because defendants benefited financially from their inclusion in the plan to the detriment of the participants.”

By choosing and then retaining these proprietary investment funds, the complaint continues, the defendants enriched themselves at the expense of their own employees.

“The defendants also breached their fiduciary duties by failing to monitor the plan’s administrative fees, and likewise failing to consider the prudence of retaining a poorly performing money market fund,” the complaint continues. “The defendants committed further statutory violations by engaging in conflicted transactions expressly prohibited by ERISA.”

The lengthy complaint examines each of these issues in term, echoing language and arguments from the previous rash of ERISA self-dealing lawsuits that have been filed against large financial services providers across the United States. Like many of the prior cases, which have found various degrees of success so far in early pleading motions and preliminary rulings, this one names a sizable list of defendants beyond State Street Corp, including the company’s benefits and investment committees.

The complaint also questions the general prudence of a financial services company providing the bulk of the investment products offered within its own retirement plan.

“No one investment management firm is good at everything,” the complaint states. “Some investment management firms excel at providing fixed-income investment products, others at equity investment products, and still others at international and emerging market investment products. Prudent fiduciaries for large plans understand this fact and accordingly take a ‘best of breed’ approach in assembling menus of retirement plan investment options for their retirement plan investors, carefully and diligently searching among the various vendors in the retirement plan investment product market to construct a suitable and appropriately low-cost and diversified array of investment options.”

The complaint alleges that, with the exception of one money market fund and a brokerage window built into the plan, defendants offered participants only State Street Funds as their designated retirement investment options.

“Participants [were treated] as captive investors to prop up the company’s investment management business, while other investors were exiting or decreasing their positions in these funds, and the company was thereby losing the revenue from non-plan investment sources,” the complaint alleges.

According to the complaint, the only non-proprietary retirement investment option offered through the plan is the Vanguard Money Market Fund.

“Yet even this fund has not been a suitable investment for the plan during the relevant period because of its continuously poor track record,” the complaint states. “Specifically, the fund has fallen well below its designated benchmark in its one-year, five-year and 10-year performance history. Given this dismal performance record, it is evident that the defendants failed to consider the continued prudence of retaining the money market fund in the plan at any time during the relevant period, let alone replace it with a better performing and cost-efficient alternative in furtherance of the participants’ interests.”

The full text of the complaint is available here.

Compliance May 25, 2021

Russell Investments Draws Self-Dealing Scrutiny

Plaintiffs in a new ERISA lawsuit say Caesars Entertainment allowed Russell Investments to pack its plan with proprietary investment options, to the disadvantage of plan participant outcomes.

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A new Employee Retirement Income Security Act (ERISA) lawsuit filed in the U.S. District Court for the District of Nevada names both the plan sponsor, Caesars Entertainment, and the investment manager, Russell Investment Management, as defendants.

The case includes various allegations of self-dealing and fiduciary imprudence and disloyalty related to the purchase and provision of discretionary investment management services provided by Russell to the Caesars Entertainment Corp. Savings & Retirement Plan since 2017.

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“As described herein, Russell obtained control of the plan’s investment menu in 2017 and promptly filled the plan with its own poorly performing proprietary funds,” the complaint states. “Russell’s gambit was a life preserver for its struggling funds and brought $1.4 billion in new investment at a critical time when other plan sponsors were leaving Russell’s funds. The deal did not promote the interest of plan participants, however, as the plan already had in place a menu of leading funds that consistently outperformed Russell’s funds at similar or lower levels of risk.”

The complaint alleges that the defendants’ actions have cost participants more than $100 million in lost investment earnings to date. Asked for a statement regarding the allegations, Russell Investments provided the following: “We believe this lawsuit is without merit, and we intend to vigorously defend the firm against these allegations.”

The text of the lawsuit recalls the leveraged buyout of the Caesars company in 2008 by private equity firms, as well as its resulting bankruptcy. According to the complaint, the casino and entertainment company’s owners eliminated matching contributions for three straight years and brought them back at low levels until well after the company emerged from bankruptcy and related litigation in late 2017.

“As Caesars’ owners and executives scrambled to solve the company’s unsustainable leveraged buyout debt, unloading plan responsibilities to a ‘fiduciary outsourcing’ provider such as Russell was an attractive option,” the complaint alleges. “Russell took over control of the plan’s investment menu in 2017 as a fractured Caesars was divvied up among creditors.”

According to the complaint, the plan’s menu did not need an overhaul.

“The plan offered leading, low-cost investment funds, including age-based balanced options managed by State Street with long track records of success,” the complaint states. “But instead of prudently and objectively evaluating the plan’s needs, Russell transferred all of the plan’s $1.4 billion in assets to its own proprietary funds, including more than $1 billion to its fledgling age-based funds. … There was no participant-focused justification for Russell’s swap at the time. Over short and long periods prior to the transfer, the existing options, on balance, performed better at similar or lower levels of risk. The deal was a boon to Russell, however, which was able to add $1.4 billion in new investment to help prop up its funds at a difficult time for the funds.”

The plaintiffs go on to allege that, as of the end of 2019, which is the reporting date of the plan’s most recent public filings, the plan had about 42,000 participants and $1.6 billion in assets.

“Russell’s affiliated funds continue to make up 100% of the plan’s investment options,” the complaint states. “Around 75% of the plan’s assets are invested in Russell’s age-based funds.”

According to the plaintiffs, the plan re-enrolled participants so their accounts would be automatically invested in the default age-based option for their age group, unless they affirmatively elected to create a custom portfolio.

“The plan’s assets offered a life preserver to Russell when Russell took over the plan’s menu amid the rash of redemptions in its age-based funds in 2017,” the complaint continues. “Without $1 billion in new investment in its age-based funds from the plan, Russell would have suffered a further 25% decrease in reported assets in the funds by year-end 2017 (even after accounting for appreciation during the year). But by moving the plan to its age-based funds, Russell prevented another material decline, doubled assets in the funds compared to their year-end position without the plan, and returned to 2013 asset levels.”

The complaint concludes with failure-to-monitor allegations targeted at the Caesars fiduciaries.

“Although outsourcing fiduciary control of an investment menu is not a breach standing alone, Caesars had a duty to act prudently in the process of delegating investment authority and monitoring its selected provider,” the complaint states. “Based on Russell’s conflict of interest in selecting its own funds and the inferior track record of the Russell funds relative to the plan’s existing menu, it does not appear that Caesars prudently reviewed Russell’s investment plan prior to retaining Russell or surveyed Russell’s actions after Russell assumed control. Moreover, as losses piled up, Caesars should have monitored Russell’s ongoing poor results and removed Russell.”

The full text of the complaint is available here. Caesars Entertainment has not yet responded to a request for comment.  

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