A class action complaint has been filed against Starwood Hotels & Resorts Worldwide, Inc. accusing it of serially breaching its Employee Retirement Income Security Act (ERISA) fiduciary duties in the management, operation and administration of its employees’ 401(k) plan, the Starwood Hotels & Resorts Worldwide, Inc. Savings & Retirement Plan.
The complaint notes that the United States Supreme Court held in Tibble v. Edison International that plan fiduciaries have an ongoing duty to monitor investments. Participants allege that Starwood had the bargaining power to obtain and maintain low fees. However, Starwood did not exercise this power for many years. At about the same time as the Tibble decision, Starwood managed to cut the fees of its fund offerings in half. Fees were reduced an average of 40 basis points (.40%). This means that for the prior five years, an unnecessary $20 million in fees were incurred by plan participants—40 basis points times $1 billion in assets equals $4 million per year in excess fees or $20 million over a five year period, the plaintiffs calculate.
The lawsuit also cites a survey by NEPC, an independent investment consulting firm, which found that the median recordkeeping costs of 113 plans was $64 per plan participant in 2015. The Starwood Plan has consistently averaged recordkeeping and administrative fees that are close to $100, more than 50% higher than the median cost of $64. As a Plan with assets well over $1 billion, Starwood could have negotiated substantially lower recordkeeping and administrative fees, the participants allege.
The complaint also states that Starwood engaged in the practice of revenue-sharing with the investment funds it offered plan participants. This means that funds paid Starwood monies for their inclusion in the investment menu. However, Starwood does not disclose the amount of revenue sharing it received.NEXT: Ignoring investment allocations and no stable value fund
For one named plaintiff, the complaint says he elected to have his contributions diversified over six separate funds, but Starwood ignored that directive and put 100% of his money into a single fund, the BlackRock LifePath 2050 Index Fund. For five years, Starwood completely ignored the participant’s instructions and instead put 100% of his money into a fund where he designated that 0% be invested, the lawsuit alleges. In 2016, Starwood finally put 12% of the participant’s money into the six funds that he had selected, but still left 88% of his money in the LifePath 2050 Fund that he had not even selected. “Plaintiffs are informed and believe that Starwood failed to employ reasonable and prudent mechanisms to ensure that investment allocation decisions of participants were followed,” the lawsuit says.
Starwood is also accused of allowing participants to incur a double layer of fees for investments. For example, the BlackRock Life Path 2050 Index Fund institutional shares have net operating expenses of .20%. The 2050 Index Fund is a fund that invests all of its assets in other BlackRock funds; 52% of the Life Path Index Fund was invested in the BlackRock Russell 1000 Index Fund now known as the BlackRock Large Cap Index Fund. The Russell 1000 Index fund had net operating expenses of .08%. Thus, the fee paid by Plan participants is .20% plus .08% for a total of .28%. In contrast, the complaint says, the Vanguard Institutional Index Fund Institutional Shares has a total expense ratio of only .04% so the plan has chosen funds with fees that are 700% more than the comparable Vanguard fund—a difference of 24 basis points. Twenty-four basis points on $280 million in assets equals $4 million in excess fees over six years, the plaintiffs calculate.
Finally, the participants say by failing to offer a stable value fund as an investment option in addition to a money market fund, Starwood failed to fulfill its fiduciary duties to participants to offer them a reasonable and adequate array of investment choices. The complaint notes that as of December 31, 2015, the plan had $133 million invested in a money market fund which only earned .65% a year. It offered no stable value fund at all. A stable value fund would have provided essentially the same level of risk as a money market while delivering much better return. For example, Vanguard offers the Battelle Stable Value Fund which has had a five year return of 2.94%, or 2.29% more than the Starwood’s Plan’s money market. An enhanced performance of 2.29% on $133 million over six years equals lost income to plan participants of $18 million, the plaintiffs say.
“As the result of the foregoing conduct and omissions by Starwood, Plaintiffs and all persons similarly situated have sustained monetary losses in an amount to be determined at trial, but believed to be well in excess of $25 million,” the complaint states.