The latest Employee Retirement Income Security Act (ERISA) lawsuit filed in federal court is targeting Salesforce for a number of alleged fiduciary breaches in the operation of its defined contribution (DC) retirement plan.
The complaint was filed in the U.S. District Court for the Northern District of California and seeks class action status on behalf of a sizable group of retirement plan participants and beneficiaries. Named as defendants are Salesforce itself, along with its board of directors and its investment advisory committee.
According to the complaint, the Salesforce plan had more than $2 billion in assets at the end of 2018. The complaint, echoing numerous other excessive fee lawsuits filed under ERISA, states that the size of the plan gives it substantial bargaining power to negotiate lower fees for both investment products and for recordkeeping services.
“Defendants, however, did not try to reduce the plan’s expenses or exercise appropriate judgement to scrutinize each investment option that was offered in the plan to ensure it was prudent,” the complaint alleges.
Salesforce is accused of failing to take advantage of the lowest cost share class available for many of the mutual funds offered in its retirement. The defendants are further accused of failing to consider the use of collective investment trusts, comingled accounts or separate accounts as alternatives to mutual fund offerings, despite potentially lower fees.
Notably, case documents show Salesforce has actually changed some of the practices that are criticized in the complaint. But the plaintiffs argue that these changes were made too late and that the plan fiduciaries should be held financially liable for not making these “prudent” decisions earlier.
“It appears that in 2019, five years into the class period, wholesale changes were made to the plan wherein certain plan investment options, some of which are the subject of this lawsuit, were converted to [lower cost] shares,” the decision states. “These changes were far too little and too late as the damage suffered by plan participants to that point had already been baked in. There is no reason not to have implemented these changes by the start of the class period, when the majority of lower-cost shares were available.”
Important context for understanding these allegations comes from the fact that large employers across the United States are fighting practically identical claims, with mixed success. So far the federal courts have promulgated a complex and even contradictory mix of decisions, some of them seeming to favor plaintiffs and others defendants.
In this particular case, much of the text of the complaint is dedicated to a basic recitation of the fiduciary duties under ERISA, to the fact that passive investments can cost less than active investments, and to establishing that collective investment trusts and other investing vehicles available to large retirement plans can cost less than mutual funds. Only after spelling out this general information does the complaint claim the Salesforce fiduciaries failed to prudently and loyally monitor their plans expenses.
“The funds in the plan stayed relatively unchanged from 2013 until 2019,” the complaint states. “Taking 2018 as an example year, almost half of the plan’s core investments (including all but one of the target-date funds[TDFs]) were much more expensive than comparable investments found in similarly-sized plans (plans having over a billion dollars in assets). The expense ratios for these funds were in some cases up to 135% (in the case of the Fidelity Contra Class K) above the median expense ratios in the same category. … At all times during the class period, defendants knew or should have known of the existence of cheaper share classes and therefore also should have immediately identified the prudence of transferring the plan’s funds into these alternative investments.”
The full text of the complaint is available here. Salesforce has not yet responded to a request for comment.