Compliance August 16, 2021

SeaWorld ERISA Lawsuit Seeks Sizable Damages

The text of the lawsuit notes the fast pace of the filing of excessive fee lawsuits against retirement plans operated by major U.S. employers, arguing SeaWorld owes its own employees more than $50 million in damages.

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A proposed class of plaintiffs has filed a new Employee Retirement Income Security Act (ERISA) lawsuit against SeaWorld Parks and Entertainment Inc. and a host of related defendants, leveling their claims in the U.S. District Court for the Southern District of California.

As alleged in the text of the lawsuit, this case comes in response to “another example of a large plan filling its 401(k) plan with expensive funds when identical, cheaper funds were available, and overpaying covered service providers when the plan had more than sufficient bargaining power to demand low-cost administrative and investment management services and well-performing, low-cost investment funds.”

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Specifically, the lawsuit alleges the defendants breached their fiduciary duties of prudence and loyalty to the plan by doing the following:

  • Offering and maintaining higher cost share classes when identical, lower cost class shares were available, resulting in participants paying additional unnecessary operating expenses with no value to the participants and resulting in a loss of compounded returns;
  • Overpaying for covered service providers by paying variable direct and indirect compensation fees through revenue sharing arrangements with the funds offered as investment options under the plan;
  • Failing to engage in a competitive bidding process by submitting a request for proposals (RFP) to multiple service providers including recordkeepers, shareholder service and financial advisers;
  • Imprudently choosing and retaining expensive funds that consistently failed to meet or exceed industry benchmarks or had sufficient history to be offered in the plan; and
  • Failing to offer and retain a diverse pool of investment funds in accordance with the industry standard.

SeaWorld has not yet responded to a request for comment about the lawsuit. Cases including similar allegations made against other large U.S. employers have met mixed outcomes across the federal district court system. Some have advanced quickly, either being summarily dismissed or settled, while others have seen extensive legal wrangling and full bench trials, all based on the facts of each case and on the varying degrees of willingness of individual judges to grant standing to ERISA fiduciary breach plaintiffs.

Though the defendants are headquartered in Florida, the suit argues the California court has jurisdiction over this matter because the company transacts business in the state and has significant contacts in the Southern District of California, for example because one or more plaintiffs reside and were employed in the district—and because ERISA provides for nationwide service of process.

Although not named as defendants, a number of prominent financial services providers are cited in the litigation as “parties of interest,” including the Massachusetts Mutual Life Insurance Co. (MassMutual), which served as the recordkeeper of the plan until December 31, 2019, when Prudential Retirement Insurance and Annuity Co. replaced MassMutual as recordkeeper. LPL Financial LLC is cited as another party of interest, based on the fact that it allegedly served as the plan’s designated shareholder service provider until sometime in 2014. Finally, Alliant Retirement Services LLC is also referred to as a party of interest, as it allegedly became the plan’s designed financial adviser beginning in 2014.

The complaint states that, since the inception of the plan on March 1, 2010, defendants have offered higher cost mutual fund share classes as investment options for the plan, “even though 90% of the time, lower cost class shares of those exact same mutual funds with the same attributes were readily available to the plan throughout its duration.” All of the funds allegedly had sufficient assets and attributes to qualify for the lowest-cost share classes available, according to the plaintiffs.

Similar to many other ERISA lawsuits of this type, the text of the complaint includes a substantial number of charts and graphs purporting to calculate the excessive fees and lost opportunity costs suffered by participants, in this case reaching a figure in excess of $50 million. It also speaks scathingly about the use of revenue sharing by the plan fiduciaries, alleging they used revenue sharing structures within the plan’s investment menu and recordkeeping platform in order to defray company costs. The complaint also states that the fiduciaries paid recordkeeper fees that are far higher than a prudent fiduciary would accept.

“The extra fees cost plan participants over a million dollars per year,” the complaint alleges. “For example, the class A shares of the target-date funds [TDFs] alone cost participants over $900,000 in 2015 over their least expensive option.”

The full text of the complaint is available here.

Compliance August 13, 2021

Court Denies Dismissal of Amway ERISA Lawsuit

Among other allegations, the complaint says defendants continued to offer certain investment options despite the availability of identical or similar investment options with lower costs and/or better performance.

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The U.S. District Court for the Western District of Michigan has ruled against the defense’s dismissal motion in an Employee Retirement Income Security Act (ERISA) lawsuit filed last year against Alticor Inc., the parent company of Amway.

Former participants in the Amway Retirement Savings Plan filed the lawsuit in November, accusing fiduciaries of breaching their duties under ERISA by failing to monitor and control investment costs.

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The plaintiffs claim that at all times during the proposed class period, which runs from November 9, 2014, through the date of judgment, Amway’s retirement savings plan had at least $1.1 billion in assets under management (AUM), qualifying it as a jumbo plan in the defined contribution (DC) space. As a jumbo plan, the plaintiffs say, the plan had substantial bargaining power regarding investment fees and expenses. Instead, the plaintiffs claim the defendants—including various retirement plan committees and Alticor Inc. itself—did not attempt to reduce the plan’s expenses or exercise appropriate judgment to scrutinize each investment option within the plan to ensure it was prudent.

Additionally, the complaint says defendants continued to offer certain funds in the plan despite the availability of identical or similar investment options with lower costs and/or better performance histories and failed to control the plan’s recordkeeping costs by using revenue sharing.

As is often the case in ERISA excessive fee litigation of this nature, the defendants have denied these allegations and filed a technical dismissal motion seeking to halt the litigation prior to the discovery process, in this case by making the argument that the district court is the improper venue for this matter. While far from the end of the defense, the new ruling makes clear that the judge presiding over the case feels the plaintiffs have sufficiently alleged that wrongdoing might have occurred—thus raising legal issues that are within the court’s purview.

As the District Court’s ruling states, such a motion to dismiss for a lack of subject matter jurisdiction, made under the Federal Rule of Civil Procedure 12(b)(1), may take the form of a “facial challenge,” which tests the sufficiency of the pleading, or a “factual challenge,” which contests the factual predicate for jurisdiction. In a facial attack, the court accepts as true all the allegations in the complaint, similar to the standard for a Rule 12(b)(6) motion. In a factual attack, the allegations in the complaint are not afforded a presumption of truthfulness, and the district court weighs competing evidence to determine whether subject matter jurisdiction exists.

After spelling this out, the ruling states that the defendants’ various arguments toward dismissal are “somewhat confusing, because they do not dispute that [the plaintiff] has standing to bring a claim based on excessive recordkeeping fees, instead arguing that he cannot bring a claim based on [the] selection of challenged funds.

“But those are both arguments in Count I of the plaintiffs’ complaint,” the ruling continues. “This court declines to split the plaintiffs’ causes of action at this stage. Given the defendants’ concession that [the plaintiff] may have been injured by excessive fees, the court concludes that [the plaintiff] has satisfied the requirements of [standing] because he has alleged actual injury to his plan accounts. This injury is fairly traceable to the defendants’ conduct, a causal connection between the defendants’ alleged conduct and [the plaintiff’s] losses exists, and [the plaintiff] has demonstrated a likelihood that his injuries will be redressed by a favorable judgment. Thus, the court will deny the portion of the motion to dismiss based on subject-matter jurisdiction.”

That determination brings the court to the merits of the plaintiffs’ claims—and similar results ensued.

“At the outset, the court rejects the defendants’ argument that because the plaintiffs have retained counsel that have filed factually similar cases, their allegations are so generic that they cannot survive a motion to dismiss,” the ruling states. “There is no rule against hiring counsel that specialize in one cause of action or type of lawsuit, and the court declines to dismiss the complaint on this ground alone.”

Later on, the ruling presents some important context for its treatment of these matters by reviewing various orders made by appellate courts in related cases.

“The court must note the circuits split regarding what is necessary to plead a violation of ERISA’s duty of prudence,” the ruling states. “The Third, Eighth and Ninth Circuits have held that allegations regarding imprudent investment selections and excessive fees, such as the ones presented by the plaintiffs here, may state a claim for violation of ERISA. The Sixth Circuit has not yet weighed in, but the Western District of Tennessee, the Middle District of Tennessee and the Eastern District of Michigan have recently allowed similar claims to proceed. The Seventh Circuit disagrees, but a petition for certiorari has been granted in the Seventh Circuit case. Absent guidance from the Supreme Court or the Sixth Circuit, [this court] finds the majority view to be more persuasive than the Seventh Circuit’s position.”

Other important points made in the ruling denote how the court concludes that fiduciaries in this context have “a constant duty to replace imprudent investments,” meaning the fact that defendants eventually moved to replace certain challenged funds does not give rise to a blanket presumption of prudence. Furthermore, the court states that whether the fiduciary failed to leverage its size to negotiate a cheaper cost or was simply “asleep at the wheel” and failed to notice cheaper options is irrelevant at this stage: “Either way is sufficient to state a claim for breach of duty of prudence.”

The full text of the ruling is available here.

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