Compliance January 11, 2021

District Judge Grants Dismissal of Vail Resorts ERISA Lawsuit

Central to the dismissal is the consideration of several issues of standing.

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A new ruling out of the U.S. District Court for the District of Colorado grants the dismissal motion filed by the defense in an Employee Retirement Income Security Act (ERISA) lawsuit known as Kurtz v. Vail Corp.

The underlying lawsuit accuses the Vail Corp. of permitting excessive fees in the Vail Resorts 401(k) Retirement Plan. According to the complaint, for at least 18 of the 27 mutual fund share classes available within the plan, the same issuer offered a different share class from that selected by the plan that charged lower fees, and consistently achieved higher returns. The plaintiff says the plan “inexplicably failed to select these lower fee-charging and better-return producing share classes.”

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The complaint also alleges that the administrative fees charged to Vail plan participants are greater than more than 90% of its comparator fees when calculated on a cost-per-participant basis, or as a percent of total assets, without the provider delivering commensurate value. Finally, the complaint suggests the defense imprudently failed to provide a sufficient number of passively managed investment options.

In ruling against these allegations and granting Vail’s dismissal motion, the District Court echoes some of the same points made in the recent dismissal ruling filed in favor of Salesforce. Central to the dismissal is the consideration of several issues of standing.

As the text of the Vail ruling recounts, the defendants argue that the lead plaintiff only invested in five of the many plan options that she challenges. As a result, the defendants contend, the lead plaintiff has no standing to challenge the remaining options, because she has not alleged a “concrete and particularized” injury in fact. In response, the ruling recounts, the plaintiff asserts that she does not bring independent claims for each of the challenged funds, but instead brings a single claim for mismanagement of the entire plan.

“There is no 10th Circuit authority on point for this issue,” the judge states. “After my own review of the case, I conclude that this case is more similar to ones in which courts have found standing to exist even without plaintiff investing in each individual option. … I conclude that plaintiff has both statutory and constitutional standing to bring this suit against the defendant for alleged breach of fiduciary duties under ERISA. However, because I find below that her claim fails under Rule 12(b)(6), this issue is ultimately irrelevant.”

Turning to the standing issues under the Federal Rule of Civil Procedure 12(b)(6), the ruling recalls that the defense argues that the lead plaintiff fails to allege facts sufficient to constitute a breach of fiduciary duties under ERISA.

“A plaintiff must show that a more prudent plan management process would have avoided the alleged harm, which necessarily requires a plausible allegation explaining how no reasonable fiduciary could conclude that removing such investments would not be likely to do more harm than good to the plan and its participants,” the ruling states. “In essence, this requires alleging facts that plausibly establish that no reasonable fiduciary would have retained a set of investments had the fiduciary engaged in proper monitoring, and that abandoning the investments could have presented the plan’s losses. It is not sufficient to simply allege that an investment did poorly, and, therefore, a plaintiff was harmed—relative underperformance is insufficient to state a claim.”

The ruling goes on to state that much of plaintiff’s complaint is taken up by statements explaining what ERISA requires, or providing generic background about performance of different types of investment funds.

“The deceptively long complaint can thus be boiled down to a few factual allegations,” the ruling states. “The defendant’s motion asserts that plaintiff has failed to plead sufficient facts to surpass the 12(b)(6) standard. I agree. While certainly specific, plaintiff’s allegations are insufficient to support a claim for breach of fiduciary duty. Nowhere in the complaint does plaintiff allege anything imprudent about defendant’s process. In fact, it does not address at all Vail’s process for selecting or retaining fund options, monitoring expenses, or managing the overall plan. Nor does it provide any factual allegations regarding whether the defendant employed the appropriate methods to investigate and determine the merits of any investments.”

The suit was dismissed with prejudice, which means it can’t be brought back to court.

The full text of the dismissal ruling is available here.

Compliance January 11, 2021

VALIC Sued Over Surrender Fees Charged to 401(k) Plan

The lawsuit says VALIC engaged in a prohibited transaction, as well as self-dealing, in violation of ERISA when surrender fees were charged during the transfer of assets to a new provider.

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The administrator of the D.L. Markham, DDS, MSD, INC. 401(k) Plan has filed a lawsuit against the Variable Annuity Life Insurance Co. (VALIC) over fees he says were improperly withheld from plan assets.

“Fundamentally, this class action seeks to right defendants’ wrongs of targeting and exploiting unsophisticated small employers seeking to provide benefits to their employees,” the complaint states.

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Effective May 18, 2018, David Markham hired VALIC to maintain the plan on VALIC’s retirement platform by entering into an agreement with VALIC whereby it would provide administration, individual services and investment products.

The annuity contract selected by Markham for the plan was the Portfolio Director Group Fixed and Variable Deferred Annuity Contract, a fully allocated group fixed and variable deferred annuity contract for which VALIC serves as the issuer and contract recordkeeper of the assets invested under the contract.

In or around January 2020, Markham determined that the investment returns and quality of services provided were insufficient to justify the high fees imposed by VALIC through the investment funds it made available to plan participants. Markham informed VALIC that he intended to terminate the plan’s contract with VALIC and select a successor plan service provider.

In an email to Luminita Markham, David Markham’s wife and co-owner of the dental practice, on April 30, providing information relating to the plan’s deconversion from the VALIC system, a VALIC representative pointed out that the annuity contract provided for a 5% surrender charge on transfers out of the contract on amounts contributed in the previous 60 months, which would effectively cover all assets to be transferred by the plan. Only VALIC is expressly authorized to waive the surrender charge.

According to the lawsuit, David Markham did not have actual knowledge of the surrender fee until communications with VALIC last year. “Moreover, plan administrators would not have understood that VALIC applies the surrender charge to the termination of a plan’s relationship with VALIC because its disclosures state only that the surrender fee provision would be imposed on participants who chose to withdraw funds from their account,” the complaint states.

Markham’s firm delayed implementing its decision to terminate VALIC’s services while it retained counsel. He then requested a waiver of the surrender fee. Markham’s counsel sent VALIC a letter on June 23, alerting VALIC to the prohibition on penalty charges imposed by service providers under the necessary services prohibited transaction exemption set forth in the Employee Retirement Income Security Act (ERISA). On August 7, after a review by VALIC’s Executive Review Committee, a consultant in AIG’s Retirement Services division informed Markham that the committee had decided to impose the surrender fee upon the transfer of plan assets. AIG is the parent company of VALIC.

On or about August 19, all plan assets were transferred from the VALIC platform to the successor service provider’s platform. A surrender fee of $20,703 was retained by VALIC, representing approximately 4.5% of the pre-fee account balances.

The complaint points out that under ERISA, a contract for services is exempt from the prohibited transaction rules if the contract is for services is necessary for the operation of the plan and no more than reasonable compensation is paid by the plan. A contract for services is not reasonable unless it permits the plan to terminate the contract without penalty on reasonably short notice. “An early surrender fee does not reasonably compensate for loss if it provides for payment in excess of actual loss. VALIC’s early surrender fee, which provides for payment in excess of any actual loss, is prohibited by ERISA,” the complaint states.

The suit was filed on behalf of all ERISA covered plan administrators and plans that entered an agreement with VALIC in which VALIC had discretion to impose a surrender charge on outgoing transfers and which paid VALIC a fee of any kind since January 4, 2018. It was also filed on behalf of a “self-dealing subclass,” defined as: “All ERISA covered plan administrators/plans that entered an agreement with VALIC in which VALIC imposed the surrender charge on outgoing transfers since January 4, 2018.”

According to the complaint, VALIC’s audited statutory financial statements ending on December 31, 2019, show that it held $3.945 billion in group annuities that include a surrender charge of 5% or more. “Based on that amount there would be well over 8,000 class members if they are all comparably sized to the plaintiff plan,” the complaint says.

The lawsuit requests the court issue an order requiring VALIC to provide an accounting for, and to disgorge, all losses caused to class members’ plans—including all fees retained—as a result of its knowing participation in a prohibited transaction as a nonfiduciary. In addition, it asks that the court order require VALIC to restore all losses caused to the subclass members’ plans as a result of its self-dealing prohibited transaction as a fiduciary in imposing the surrender fee.

VALIC and AIG have declined to comment about the lawsuit.

In November 2019, AIG confirmed that the Securities and Exchange Commission (SEC) was investigating the 403(b) annuity sales practices of VALIC. In July, the SEC charged Houston-based VALIC Financial Advisors Inc. (VFA) in a pair of actions for failing to disclose to teachers and other investors practices that generated millions of dollars in fees and other financial benefits for VFA.

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