Compliance July 7, 2021

ERISA Lawsuit Filed Against AAA Carolinas

The plaintiffs in the case say that when the plan switched to cheaper share class TDFs, participant accounts should have been ‘repaired.’

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Carolina Motor Club, doing business as AAA Carolinas, and subsidiaries of the American Automobile Association (AAA) club based in Charlotte, North Carolina, are accused of violating provisions of the Employee Retirement Income Security Act (ERISA), costing plan participants and beneficiaries millions of dollars.

The complaint says plan fiduciaries did this by incurring excessive fees that were paid by plan participants, failing to diversify investments, engaging in prohibited transactions with parties in interest and failing to monitor co-fiduciaries. The scope of plaintiffs and/or class members in this case is limited to members of the AAA Carolinas Savings & Investment Plan and members of the Auto Club Group Tax Deferred Savings Plan who were previously members of the AAA Carolinas plan.

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In a statement to PLANADVISER, AAA Carolinas said, “We are in receipt of the complaint and are in the process of reviewing. We do not have further comment at this time.”

The complaint says the case is another example of a large plan with bargaining power filling its 401(k) plan with expensive funds when identical, cheaper funds were available. However, the plaintiffs say the case “presents a unique optic.” When AAA Carolinas merged into another company, the two companies’ plans merged. The complaint includes details implying that prudent audit practices at the acquiring company, Auto Club Group, were not followed once the plans were merged. The plaintiffs note that at the time of the merger, even though the acquiring company’s plan was about 15 times larger, it had lower administrative costs than AAA Carolina’s plan.

The case alleges that the defendants “flooded the plan” with expensive, often underperforming investment options for participants to choose from until there was “a small change in direction in or around 2018.” It also alleges that the defendants never put the recordkeeping contract for the plan up for a bid to bring in more competitive offers from other service providers. The complaint says the defendants allowed the plan’s advisers and recordkeeper to take large amounts of money from the plan and its participants through fees and compensation mechanisms that were “much higher than those warranted by the amount of work these service providers were completing.”

The plaintiffs contend that revenue sharing and 12b-1 fee arrangements were possible incentives for the defendants to put higher-cost funds into the plan because they allowed service providers to charge fees to participants while the plan sponsor avoided paying fees.

The lawsuit specifically calls out a 2015 move of about half of the plan’s assets from non-target date funds (TDFs) into the JPMorgan Smart Retirement target-date series. The plaintiffs note that the defendants selected the most expensive of the available share classes. They suggest that the defendants could have easily used the free FundAnalyzer tool provided by the Financial Industry Regulatory Authority (FINRA), which would have allowed them to enter different investments into the website and get information regarding their returns and expected costs.

The complaint goes on to say that on or about January 1, 2019, the “defendants appear to have realized around this time that adding these JPMorgan funds as the default option in 2015 and seeding them with existing trust assets was an imprudent mistake that cost millions of dollars.” The defendants swapped the JPMorgan funds for an American Funds target-date series and selected the R6 share class.

The plaintiffs contend that the defendants then did nothing to “repair” the alleged damage of the prior four years on participants’ accounts. “This is in direct contradiction to the language of the IRS’ correction program, which states in part that to maintain tax-exempt status, defendants must ‘apply [a] reasonable correction method that would place affected participants in the position they would’ve been in if there were no operation plan defects.’”

The complaint also includes an analysis of fees paid to covered service providers and arguments about why they are excessive. It says that because the defendants chose to compensate their providers using asset-based revenue sharing, the service providers systematically received unjustified increases in pay. As plan assets increased from 2014 to in 2019, the recordkeeper’s compensation, which was asset-based, nearly tripled. The plaintiffs note that in that time period, the number of participants for whom the recordkeeper had to maintain records fell by 14%.

Compliance July 7, 2021

Plaintiffs in T. Rowe Price ERISA Lawsuit Denied Interlocutory Appeal

The plaintiffs wanted an appellate court to decide whether a plan amendment requiring the use of T. Rowe Price funds in the firm's retirement plan violated ERISA.

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Chief Judge James K. Bredar of the U.S. District Court for the District of Maryland has denied T. Rowe Price 401(k) plan participants’ request to get an appellate court’s take on an issue in their Employee Retirement Income Security Act (ERISA) lawsuit against the firm.

The plaintiffs had asked the court to amend its previous memorandum on summary judgment to certify an interlocutory appeal on the question of whether certain language in the retirement plan document is void under ERISA. The interlocutory appeal means the plaintiffs want the 4th U.S. Circuit Court of Appeals to decide that issue while other aspects of the case are proceeding in the U.S. District Court for the District of Maryland.

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The plaintiffs take issue with a 2014 plan amendment, which the plan trustees initially called a “shop at home” amendment and both parties in the case now call a “hardwiring” amendment. The amendment requires the trustees to offer only T. Rowe Price funds on the investment menu for the plan. The plaintiffs argue that the amendment was intended to shield the trustees from liability in the event their decision to offer only T. Rowe Price funds was determined to violate the trustees’ fiduciary duties.

The plaintiffs say the hardwiring amendment violates Section 1110(a) of ERISA, which says that “any provision in an agreement or instrument which purports to relieve a fiduciary from responsibility or liability for any responsibility, obligation or duty under this part shall be void as against public policy.”

According to Bredar’s order, the law provides that when a district court judge believes an order not ordinarily appealable “involves a controlling question of law as to which there is a substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation, he shall so state in writing such an order.” The judge found the plaintiffs did not meet these standards for justifying an interlocutory appeal.

The plaintiffs do not identify a controlling question of law and an appeal would not materially advance the termination of the lawsuit, Bredar said. Because all three standards must be met and two are not, the judge said, he does not need to consider whether there is a substantial ground for difference of opinion.

The issue of whether the hardwiring amendment is permissible under ERISA is not a controlling question of law because a court cannot decide whether it is or not without delving into factual disputes, such as the intent of the drafters of the amendment, Bredar said. In addition, he said “there is no reason to conclude, and the plaintiffs do not allege,” that resolving the question would terminate the litigation. “Even if the Fourth Circuit were to agree with plaintiffs and hold that the hardwiring amendment violates ERISA, that would not resolve the major dispute in this case—whether the trustees are liable for independently breaching ERISA’s duties of loyalty and prudence,” he wrote in his opinion.

The judge noted that the lawsuit is a large multi-claim, multi-party and multi-year lawsuit, and he said that deciding the one issue of whether the hardwiring amendment violates ERISA would “not necessarily terminate a single claim in—let alone expedite the resolution of—this lawsuit.” The lawsuit includes a claim regarding the selection of retail versions of funds rather than cheaper versions and prohibited transaction claims related to the fees charged for the funds, among other claims. Bredar previously found these claims plausible.

Bredar added that an interlocutory appeal is more likely to occur at earlier stages in a lawsuit when resolving the question can reduce the need for a lengthy or costly discovery process. The case’s discovery period has already closed, and it is going to trial in two months.

“In short, an interlocutory appeal—regardless of its substantive outcome—would not materially advance the termination of this case because it would not remove the need for discovery, dispositive motions or, ultimately, a trial,” the judge concluded in denying the plaintiffs’ request.

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