Compliance November 18, 2019

Sutherland Global Services Accused of ERISA Fiduciary Breaches

A wide-ranging ERISA fiduciary breach complaint suggests the firm failed to adequately monitor fees and permitted unnecessary, excess fees on the investment menu.

Reported by

A group of participants in the Sutherland Global Services Inc. 401(k) Plan has filed a proposed class action Employee Retirement Income Security Act (ERISA) lawsuit against their employer in the U.S. District Court for the Western District of New York.

The lawsuit names as defendants Sutherland Global Services Inc. and CVGAS LLC, doing business as Clearview Group. The complaint also directly names as defendants several Sutherland’s senior leaders who are plan fiduciaries, along with some 20 John and Jane Doe defendants.

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For its part, CVGAS LLC is an investment manager of the plan as defined by 29 U.S.C. 1002(38). According to the complaint, “certain responsibilities in connection with the plan” were delegated to CVGAS LLC during the proposed class period, including the responsibility to select and monitor the array of investment options to be included in the plan.

Among other issues, the plaintiffs allege the defendants “failed to properly minimize the reasonable fees and expenses of the plan.”

“Defendants instead incurred expenses that were excessive, unreasonable and/or unnecessary,” the complaint states. “Defendants failed to take advantage of the plan’s bargaining power to reduce fees and expenses. Defendants failed to offer a prudent mix of investment options. Defendants impaired participants’ returns by offering actively managed retail class mutual funds as investment options instead of identical investor class mutual funds with lower operating expenses.”

According to the complaint, to the extent any fiduciary responsibilities were properly delegated, the defendants “failed to ensure that any delegated tasks were being performed prudently and loyally in accordance with ERISA.”

The complaint continues: “Defendants failed to properly undertake the requisite monitoring and supervision of fiduciaries to whom they had delegated fiduciary responsibilities. Defendants failed to discharge their fiduciary duties with the requisite expert care, skill, prudence and diligence. Defendants enabled other fiduciaries to commit breaches of fiduciary duties for which Defendants are liable.”

The plaintiffs allege that, through this conduct, the defendants violated their fiduciary obligations under ERISA and caused damages to the plan and its participants.

“Based on defendants’ publicly available statements and representations, it appears that the total administrative expenses, not including indirect compensation, incurred by the plan in 2018 exceeded $695,000 and represented expenses of more than approximately $120 per participant,” the complaint states. “In or about mid-2019, the 13 T. Rowe Price mutual funds offered by the plan were all adviser or retail class funds, as opposed to investor or institutional class funds. The adviser or retail class T. Rowe Price funds offered by the plan charge a 12b-1 fee of .25% of the fund’s net assets. A 12b-1 fee is an annual charge for marketing or distribution. Participants of the plan derive no benefit from the 12b-1 fee. … A prudent fiduciary would have selected the investor or institutional class of the mutual funds instead of the retail class of funds with the 12b-1 fee.”

In closing, the complaint demands a jury trial, rather than the typical bench trail associated with ERISA lawsuits. The full text of the complaint is here.

Sutherland Global and Clearview Group have not yet responded to requests for comment.

The Markets November 18, 2019

The Importance of Equity Compensation in a Retirement Portfolio

Many workers view equity compensation plans as a way to build significant wealth; experts say it is important to have a mix of taxed and tax-deferred savings.

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Sixty percent of workers who have an equity compensation plan intend to use the money to help fund retirement, according to a survey of 1,000 equity compensation plan participants who currently receive incentive stock options or restricted stock awards and/or participate in employee stock purchase plans (ESPPs). Their average vested balance is $97,711 and the average total value of their equity compensation is $149,835, according to Schwab Stock Plan Services.

Retirement savings is, by far, the most common goal for those building equity compensation wealth. The next highest selections are financing their children’s education (9%), financing their lifestyle for the short term (8%) and paying off debt and buying a home (both at 5%).

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Amy Reback, vice president of Schwab Stock Plan Services, tells PLANADVISER that having a diversified portfolio of both taxed and tax-deferred savings is a good strategy: “People who enter retirement with the appropriate amount of taxed and tax-deferred savings are more likely to have an enjoyable retirement. If you only have tax-deferred savings, you are still taxed when you draw down those assets, and you could have a pretty large tax bill. It could be as much as 20% or 25% of your assets.”

Schwab’s survey also found that among those with an equity compensation plan, it makes up 27% of their net worth on average. Sixty-eight percent  also hold company stock outside of their equity compensation plan, primarily in their 401(k) plan. Sixty-five percent are very or extremely confident their equity compensation plan will help them meet their financial goals, and 28% are somewhat confident.

Forty-one percent have exercised or sold some of their equity compensation during their career. The three most common reasons for doing so were thinking market conditions were favorable (41%), being fully vested and wanting to cash out (27%) and wanting to make a large purchase (25%). Among those who have never sold or exercised their equity compensation, the top three reasons were waiting for more favorable market conditions (37%), being concerned about the tax implications (30%) and wanting for their equity compensation to become fully vested (28%).

The survey also found that workers view their equity compensation plans very favorably. Thirty-one percent say it is an essential benefit, and 44% say it is an important benefit.

Asked what they like about their equity compensation benefit, 51% say it allows them to participate in the growth of their company. Fifty percent say it will help them significantly build their wealth, and 43% say it means that the success of their company will play an important part in their own success. Twenty-eight percent say the equity compensation offering was the reason or one of the main reasons they took their job, and 29% say they wouldn’t consider another job until their next vesting event. Twelve percent say they wouldn’t consider an offer from another company at all.

However, workers do want help from their employer to understand their equity compensation program. The specific areas they want help with are planning for retirement (68%), meeting their financial goals (55%), developing a financial plan (52%) and balancing equity compensation with other investments (51%).

Likewise, a worker survey by E*Trade found that when it comes to their company’s stock plan benefits, only 71% said they understand how to access their account. Only 59% understand how their vesting schedule works. Just over half, 53%, said they understand the benefit, and only 46% know how to find information about their stock plan benefit.

Equity compensation plans are not just for the highly compensated, says Aaron Shapiro, founder and CEO of Carver Edison. Options and restricted stock units are generally granted to highly compensated employees, but employee stock ownership plans and employee stock purchase plans are designed for broad-based employees, Shapiro says.

“The availability of equity compensation plans is out there, but the challenge is that most people who are eligible to participate in them cannot afford to see their paychecks get smaller,” Shapiro says. 

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