AAA Club Faces ERISA Lawsuit
The plaintiffs say prudent practices followed before a merger of retirement plans were not followed after, and they claim that when the plan switched to cheaper share class TDFs, participant accounts should have been ‘repaired.’
Carolina Motor Club, doing business as AAA Carolinas, and subsidiaries of the American Automobile Association (AAA) club based in Charlotte, North Carolina, are accused of violating provisions of the Employee Retirement Income Security Act (ERISA), costing plan participants and beneficiaries millions of dollars.
The complaint says plan fiduciaries did this by incurring excessive fees that were paid by plan participants, failing to diversify investments, engaging in prohibited transactions with parties in interest and failing to monitor co-fiduciaries. The scope of plaintiffs and/or class members in this case is limited to members of the AAA Carolinas Savings & Investment Plan and members of the Auto Club Group Tax Deferred Savings Plan who were previously members of the AAA Carolinas plan.
In a statement to PLANSPONSOR, AAA Carolinas said, “We are in receipt of the complaint and are in the process of reviewing. We do not have further comment at this time.”
The complaint says the case is another example of a large plan with bargaining power filling its 401(k) plan with expensive funds when identical, cheaper funds were available. However, the plaintiffs say the case “presents a unique optic.” When AAA Carolinas merged into another company, the two companies’ plans merged. The complaint includes details implying that prudent audit practices at the acquiring company, Auto Club Group, were not followed once the plans were merged. The plaintiffs note that at the time of the merger, even though the acquiring company’s plan was about 15 times larger, it had lower administrative costs than AAA Carolina’s plan.
The case alleges that the defendants “flooded the plan” with expensive, often underperforming investment options for participants to choose from until there was “a small change in direction in or around 2018.” It also alleges that the defendants never put the recordkeeping contract for the plan up for a bid to bring in more competitive offers from other service providers. The complaint says the defendants allowed the plan’s advisers and recordkeeper to take large amounts of money from the plan and its participants through fees and compensation mechanisms that were “much higher than those warranted by the amount of work these service providers were completing.”
The plaintiffs contend that revenue sharing and 12b-1 fee arrangements were possible incentives for the defendants to put higher-cost funds into the plan because they allowed service providers to charge fees to participants while the plan sponsor avoided paying fees.
The lawsuit specifically calls out a 2015 move of about half of the plan’s assets from non-target date funds (TDFs) into the JPMorgan Smart Retirement target-date series. The plaintiffs note that the defendants selected the most expensive of the available share classes. They suggest that the defendants could have easily used the free FundAnalyzer tool provided by the Financial Industry Regulatory Authority (FINRA), which would have allowed them to enter different investments into the website and get information regarding their returns and expected costs.
The complaint goes on to say that on or about January 1, 2019, the “defendants appear to have realized around this time that adding these JPMorgan funds as the default option in 2015 and seeding them with existing trust assets was an imprudent mistake that cost millions of dollars.” The defendants swapped the JPMorgan funds for an American Funds target-date series and selected the R6 share class.
The plaintiffs contend that the defendants then did nothing to “repair” the alleged damage of the prior four years on participants’ accounts. “This is in direct contradiction to the language of the IRS’ correction program, which states in part that to maintain tax-exempt status, defendants must ‘apply [a] reasonable correction method that would place affected participants in the position they would’ve been in if there were no operation plan defects.’”
The complaint also includes an analysis of fees paid to covered service providers and arguments about why they are excessive. It says that because the defendants chose to compensate their providers using asset-based revenue sharing, the service providers systematically received unjustified increases in pay. As plan assets increased from 2014 to in 2019, the recordkeeper’s compensation, which was asset-based, nearly tripled. The plaintiffs note that in that time period, the number of participants for whom the recordkeeper had to maintain records fell by 14%.
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