The Trader Joe’s Company has been named as the defendant in a new Employee Retirement Income Security Act (ERISA) lawsuit filed in the U.S. District Court for the Central District of California.
The proposed class action names several individual participants as well as the whole plan as plaintiffs. It alleges two primary breaches of ERISA—imprudence in the selection of investment options and a lack of care given to monitoring the services and fees paid by the $1.6 billion defined contribution plan.
According to the complaint, Trader Joe’s chose Capital Research to serve as the plan recordkeeper and investment platform. Capital Research, in turn, is the investment adviser to the American Funds family of mutual funds. The complaint states the firm’s fees are generally based on a percentage of assets invested in the American Funds. Capital Research’s fees, plaintiffs suggest, are paid by the American Funds to Capital Research based on the previous month’s daily net asset levels.
The complaint says Capital Research—which is not a defendant—also receives fees directly from the plan for recordkeeping. For example, in 2018, it received a reported $183,075 in direct compensation for recordkeeping services.
“Trader Joe’s has not disclosed to plan participants the precise amount of fees and/or income Capital Research collects from the plan,” the complaint states. “However, Trader Joe’s has disclosed that Capital Research receives ‘direct’ and ‘indirect’ fees and compensation. Discovery is need to identify exactly how much Capital Research is collecting, however, even with the limited information available to plan participants it is apparent that Capital Research’s fees and compensation is excessive.”
The complaint goes on to argue that, as a general matter, asset-based recordkeeping fees do not meet ERISA’s requirement that fees be paid on a rational basis: “The cost of recordkeeping services depends on the number of participants, not on the amount of assets in the participant’s account. Thus, the cost of providing recordkeeping services to a participant with a $100,000 account balance is the same for a participant with $1,000 in her retirement account.”
The complaint suggests Trader Joe’s chose to pay Capital Research asset-based recordkeeping fees, via three pathways. Capital Research “received direct payments from the plan for recordkeeping; Capital Research received revenue sharing payments from the mutual funds offered as past or present plan choices; Capital Research received the difference between the higher operating cost of investor class shares of mutual funds on the plan menu and the lower operating cost of institutional share classes of the same funds on the plan menu.”
The plaintiffs argue that, because revenue sharing payments are asset based, they “bear no relation to a reasonable recordkeeping fee and can provide excessive compensation.”
“It is important to emphasize that fees obtained through revenue sharing are tethered not to any actual services provided to the plan; but rather, to a percentage of assets in the plan and/or investments in mutual funds in the plan,” the complaint states. “As the assets in the plan increase, so too increases the recordkeeping fees that Capital Research pockets from the plan and its participants. One commentator likened this fee arrangement to hiring a plumber to fix a leaky gasket, but paying the plumber not on actual work provided but based on the amount of water that flows through the pipe. If asset-based fees are not monitored, the fees skyrocket as more money flows into the plan.”
Plaintiffs argue that prudent fiduciaries monitor the total amount of revenue sharing a recordkeeper receives to ensure that the recordkeeper is not receiving unreasonable compensation.
“A prudent fiduciary ensures that the recordkeeper rebates to the plan all revenue sharing payments that exceed a reasonable per participant recordkeeping fee that can be obtained from the recordkeeping market through competitive bids,” the complaint states.
The complaint goes on to suggest that Trader Joe’s retirement plan committee failed to seek competitive bids for recordkeeping, and that Capital Research is investing the plan’s assets for its own benefit.
Trader Joe’s has not yet returned a request for comment.
« Friday Files – January 3, 2019