Compliance April 5, 2021

Lawsuit Says Retirement Plan Fiduciaries Failed to Monitor and Limit Revenue Sharing

The complaint against Wesco Distribution also alleges that the defendants chose higher-cost share classes for investments.

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Wesco Distribution and the administrative and investment committee for the Wesco Distribution Inc. Retirement Savings Plan have been sued for allowing excessive retirement plan services (RPS) fees.

According to the lawsuit, from 2015 through 2019, plan participants paid a portion of the fees for retirement plan services provided by the plan’s recordkeeper directly through deductions from their accounts. In addition, RPS fees were paid indirectly through revenue sharing. “Based upon a review of the plan’s Forms 5500, and upon information and belief, the plan did not rebate any of the monies received from revenue sharing back to plan participants to offset the RPS fees paid by the participants,” the complaint says.

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The plaintiffs contend in their lawsuit that prudent retirement plan fiduciaries monitor and limit the amount of indirect compensation, such as 12b-1 and sub-transfer agency fees, to make sure that plan participants are not overcharged for recordkeeping, and they require that excessive fees be rebated to plan participants. The lawsuit says participants paid between $159 and $194 per year in RPS expenses between 2015 and 2019, calling the fees “exorbitant and unreasonable.” The plaintiffs say the fees were not in line with the fees paid by participants in other similar plans.

They also contend that the plan’s fiduciaries were required to continuously monitor RPS fees and to regularly solicit competitive bids to ensure fees being paid to the plan’s recordkeeper were reasonable. “However, defendants failed to employ prudent processes for ensuring that fees were and remained reasonable. To the extent there was a process in place that was followed by defendants, it was imprudent and ineffective given the objectively unreasonable RPS fees paid,” the complaint states.

The plaintiffs argue that the level and quality of services provided by the plan’s RPS provider did not justify paying on average more than two-and-a-half times the reasonable market rate for retirement plan services. In addition, the lawsuit says that “because revenue sharing payments are asset-based, the already excessive compensation paid to the plan’s RPS provider became even more excessive as the plan’s assets grew, even though the administrative services provided to the plan remained the same.”

The lawsuit also alleges that the defendants consistently chose mutual fund share classes with higher operating expenses when identical, lower-cost shares of the same funds were available.

Wesco Distribution has not yet responded to a request for comment.
Compliance April 5, 2021

Judge Moves Forward ERISA Suit Against Coca-Cola Bottler

The judge found that plaintiffs in the case challenging the use of an actively managed TDF suite rather than its index version have pleaded sufficient claims.

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A federal judge has moved forward a lawsuit against Coca-Cola Consolidated (formerly known as Coca-Cola Bottling Co. Consolidated), its board of directors and its benefits committee alleging that the defendants breached their fiduciary responsibilities by mismanaging the plan’s investment lineup.

The lawsuit specifically challenges the fact that the plan used the actively managed Fidelity Freedom Funds target-date fund (TDF) suite rather than the index suite. The plaintiffs say the active suite is too “high risk” to be suitable for the plan’s participants. They said it has higher fees than the index suite, and other plan fiduciaries and investors lost faith in the active suite. The plaintiffs lodged similar allegations with respect to the Carillon Eagle Small Cap Growth Fund Class R5 and the T. Rowe Price Mid-Cap Value Fund, and they allege the recordkeeping and administrative costs of the plan were excessive.

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According to Judge Frank D. Whitney’s order in the U.S. District Court for the Western District of North Carolina, in their motion to dismiss, the defendants argued that both named plaintiffs lack standing to file the lawsuit due to a lack of injury in fact. The defendants cited the case of Thole v. U.S. Bank in arguing that, in an Employee Retirement Income Security Act (ERISA) Section 502(a)(2) case, “in order to claim ‘the interests of others, the litigants themselves still must have suffered an injury in fact, thus giving’ them ‘a sufficiently concrete interest in the outcome of the issue in dispute.’”

Whitney pointed out, however, that while the Supreme Court in Thole found that the plaintiffs had not suffered an injury in fact, the justices were careful to limit their ruling, saying “of decisive importance to this case, the plaintiffs’ retirement plan is a defined benefit [DB] plan, not a defined contribution [DC] plan” and they were guaranteed “a fixed payment each month regardless of the plan’s value or its fiduciaries’ good or bad investment decisions.”

Whitney noted that with a DC plan, benefit payouts are tied to the value of participants’ accounts “and the benefits can turn on the plan fiduciaries’ particular investment decisions.” He found that plaintiffs have standing to assert their claims, as they have properly alleged they suffered an injury in fact.

Moving on to the participants’ breach of fiduciary duty claims, Whitney found the first two elements to allege a breach of fiduciary duty under ERISA are met: The plan is governed by ERISA and the plaintiffs have alleged that each defendant is a fiduciary with supporting factual allegations.

He also found the third requirement to state a claim for breach of fiduciary duty under ERISA—whether the defendants breached their duties of prudence and/or loyalty under ERISA, resulting in losses to the participants of the plan—was met.

“Courts in this circuit have found a fiduciary breach when it was alleged that a plan failed to utilize a cheaper investment option that offers identical underlying investments,” Whitney wrote in his order. “Plaintiffs here allege a failure to utilize a cheaper investment option when defendants failed to select available collective trusts and the least expensive available share class. Additionally, plaintiffs assert that the underlying investments are identical when selecting a collective trust or different share class. Therefore, the court finds plaintiffs’ factual allegations regarding defendants’ alleged failure to utilize cheaper investments that offer identical underlying investments sufficiently state a claim for breach of fiduciary duty.”

The defendants also argued that the plaintiffs had not alleged facts sufficient to meet a threshold showing that the monitoring fiduciary failed to “review the performance of its appointees at reasonable intervals in such manner as may be reasonably expected to ensure compliance with the terms of the plan and statutory standards.” However, Whitney found that the plaintiffs did make that allegation, and at this stage in the litigation “an analysis of the precise contours of the defendants’ duty to monitor … is premature.”

Finally, Whitney addressed the plaintiffs’ “knowing breach of trust” claim, noting that the 4th U.S. Circuit Court of Appeals has not yet formally recognized a claim for knowing breach of trust.

He compared the case against the Coca-Cola bottler to a case against MedStar Health Inc. in which a knowing breach of trust claim survived a motion to dismiss when there were allegations that the defendants were in a position to know of the alleged breaches of fiduciary duty. He noted that the facts in the case against the Coca-Cola bottler are similar to those in the MedStar case in that the plaintiffs allege the defendants’ roles and relationships would place them in a position to know of nonfeasance or malfeasance of the others. Therefore, Whitney found that, just as in the MedStar case, “given the allegations with respect to the roles and relationships of the defendants identified in the complaint, dismissing their claim at this time would be premature.”

The case is separate from a recently filed case against the Coca-Cola Bottler’s Association multiple employer plan (MEP).

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