Fees Paid for In-House Plan Administration Resulted in Self-Dealing

In a statement to PLANADVISER, City National Bank said, “We believe the court ruling is wrong. We are now proceeding to ask the court to reverse its ruling and to give us a fair hearing of the facts. If it fails to do so, we will appeal. We are confident that this initial ruling will ultimately be reversed.” The bank also says it adjusted fees several times.

An investigation by the Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) found that, through the end of 2011, plan fiduciaries and affiliates received millions of dollars in compensation, commissions and fees at the expense of the plan. Rather than outsource plan services to avoid potential conflicts of interest, or reimburse themselves for only direct expenses, City National Bank and other fiduciaries established compensation rates for the plan on par with those charged to the bank’s retail clients, the Labor Department said. By doing so, they created conflicts that resulted in multiple breaches of the Employee Retirement Income Security Act (ERISA).

The DOL alleged the compensation issues were compounded because City National Bank employees were not required to track the amount of time they spent working on plan issues. This allowed large and unreasonable fees to be charged to the plan, according to the complaint. Proper tracking and monitoring of expenses could have prevented this and limited plan expenses.

U.S. District Court Senior Judge Terry J. Hatter, Jr. found that City National and its subsidiaries violated ERISA by engaging in years of self-dealing. The court ordered the company to retain an independent, third-party fiduciary to assist in accounting for all compensation it received from the plan, in the form of mutual fund revenue from 2006 through 2012, plus lost opportunity costs, to correct its numerous ERISA violations. The department estimates this amount to exceed $6 million.

In its findings, the court agreed with the DOL City National failed to meet its duties as a plan fiduciary by accepting fees from the plan without any review or independent investigation into whether fees were reasonable; not reimbursing the plan upon discovering that it was charging unreasonably high fees; and not tracking any direct expenses for the plan.

The court also found that City National’s actions constituted violations of ERISA’s mandate that fiduciaries act prudently and only in the interest of the plan and its participants.

City National says it “provided colleagues with more than $93 million in profit-sharing and 401(k) employer contributions during the years in question. Our company is proud of its colleague retirement program, and we have always been committed to making sure it is administered properly and for the benefit of our colleagues.”