Plan Sponsors Sued for Investment Menu Practices

A participant in the Rollins 401(K) Savings Plan, sponsored by Rollins, Inc., has sued that plan and the Western Industries Retirement Savings Plan, as well as the plans’ administrative and investment committees and various John Does, for breaches of the Employee Retirement Income Security Act (ERISA) fiduciary duties.

According to the complaint, “Instead of leveraging the Plans’ bargaining power to benefit participants, Defendants allowed conflicted third parties to dictate Plan decisions, hiring imprudent vendors to assist with the Plan’s investments, allowing them to put improper investment funds in the Plans, and allowing them and other vendors to collect unreasonable and excessive fees, all at the expense of participants’ retirement savings.”

The lawsuit argues that, although the plaintiff is a participant only in the Rollins plan, per a 6th Circuit decision in Fallick v. Nationwide Mut. Ins. Co., she may also represent participants in the Western plan “because of the commonality of fiduciaries, service providers and investments.” Western is a wholly owned subsidiary of Rollins.

The defendants are accused of having imprudently selected higher-cost actively managed mutual funds and retail share classes versus the lowest cost institutional share classes of the same mutual funds. Although the complaint notes that the defendants acted to remove the retail share classes and replace them with institutional share classes in 2019, it says “their action in this regard has [done] nothing to 1) repair the harm to the thousands of separated employees that withdrew millions of dollars, or 2) repair the accounts of current employees for the 2014, 2015, 2016, 2017 and 2018 plan years of prohibited transactions and trust damages.”

The complaint also argues that excessive payments from the trust authorized by the defendants violated the plans and trust documents and jeopardized the plans’ tax-exempt status. In addition, it accuses the defendants of failing to diversify the investments of the plan to minimize the risk of large losses. “Over all applicable periods, the Plans’ equity funds have a 90% correlation with no provision to make available to participants less-correlated foreign bond, real estate, commodity funds, etc.,” the lawsuit states.

The 89-page complaint discusses the makeup of investment fees, including revenue sharing, and makes a case for how plan fiduciaries are supposed to select and monitor plan investments. It states, “Unchecked asset-based compensation through either direct or indirect payments such as revenue sharing ensures that service providers continually receive unjustified pay increases through contributions and capital appreciation not related to increases in labor and liability.”

It also discusses methods of paying for recordkeeping services and says, “Some plans pay for recordkeeping through ‘indirect’ revenue sharing payments from the plan’s mutual funds. Revenue sharing, while not a per se violation of ERISA, can lead to excessive fees if, as here, it is not properly monitored and capped.”

With regard to “improper selection and monitoring of plan service providers,” the lawsuit specifically names a broker/dealer representative whom it says was terminated in 2014 for “failure to follow firm policies and industry regulations.” It says the defendants’ improper payments to the broker/dealer and its representative “for work that either was not performed or was not necessary for the administration of the Plan caused a prohibited transaction that should have been reported on” IRS Form 5330 for multiple plan years.

With regard to “excessive fees,” according to the complaint, per participant recordkeeping fees increased 88% from 2009 through 2018, while the number of participants increased by just 48%. “As recordkeeping costs are directly correlated to the number of participants, there is no justification for the Plans to have uncapped asset-based compensation,” it says. The lawsuit also accuses the defendants of failing “to put the plan’s recordkeeping and administrative services out for competitive bidding at regular intervals of approximately three years.”

In addition to requesting that the plans be restored to the position they would have been in if not for fiduciary breaches, the plaintiff is asking that the court order the defendants “to reform the plans to include only prudent investments”; “reform the plans to obtain bids for recordkeeping and to pay only reasonable recordkeeping expenses”; and “require the fiduciaries to select investments and service providers based solely on the merits of those selections, and not to serve the interests of service providers.”