Compliance May 29, 2020

Plan Sponsor, Provider Sued for Adding Untested CITs to 401(k)

The 92-page complaint includes a number of other allegations, including that the plan sponsor was motivated by its relationship with the provider for its defined benefit plans.

Reported by

Participants in the Schneider Electric 401(k) Plan have sued plan fiduciaries and Aon Hewitt Investment Consulting for breach of fiduciary duties and prohibited transactions under the Employee Retirement Income Security Act (ERISA).

In an email, Aon Hewitt said, “As a matter of company policy, we don’t comment on litigation matters.” Schneider Electric has not yet responded to a request for comment.

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According to the complaint, instead of acting in the exclusive best interest of participants, the defendants selected and retained proprietary Aon Hewitt collective investment trusts (CITs) that only benefited Aon Hewitt, including by investing more than $3 billion of participants’ retirement savings in the newly created and untested Aon Hewitt Index Retirement Solution target-date funds (TDFs). The complaint also said that instead of using the plan’s bargaining power, the defendants caused unreasonable expenses to be charged to the plan and participants for recordkeeping, investment management and managed account services.

The court document said that in January 2016, Schneider Electric and the plan’s investment committee contracted with Aon Hewitt to be the discretionary investment manager for the plan. In February 2017, Aon Hewitt completely restructured the investment lineup for the plan and three other Schneider Electric benefit plans: the Schneider Electric USA Inc. Coordinated Bargaining Employees’ Retirement Savings Plan, the Industrial Repair Services 401(k) Plan, and the Schneider Electric Supplemental Defined Contribution Plan.

Besides using Aon Hewitt’s proprietary funds in the new lineup, the plaintiffs claim that the plan’s Aon Hewitt funds were new investment options with no performance history. They were created by Aon Hewitt in “partnership with Schneider Electric.”

The complaint explains that as a non-depository bank, Aon Trust Company LLC maintains the Aon Hewitt collective investment trusts and is the trustee of the funds. Both Aon Trust Company and Aon Hewitt are wholly owned subsidiaries of Aon Consulting Inc. Aon Trust Company hired Aon Hewitt as the investment adviser to perform investment advisory and investment management services with respect to each fund. Both Aon Trust Company and Aon Hewitt charge a fee for their respective trustee and investment advisory services.

The plaintiffs allege that, as the investment adviser of these collective investment trusts, Aon Hewitt had a direct conflict of interest between acting in the exclusive best interest of plan participants as the plan’s discretionary investment manager while also seeking to grow its collective investment trust business and maximize its revenue through investment advisory fees. The complaint says the investment of plan assets in Aon Hewitt’s proprietary funds resulted in Aon Hewitt earning more than $600,000 annually in additional revenue.

The defendants are also accused of using plan participants’ retirement assets to seed the untested Aon Hewitt Index Retirement Solution target-date funds at the expense of plan participants. The plaintiffs say there was no loyal or prudent reason to replace the Vanguard target-date funds previously used in the plan. They also contend that without a performance history to consider in evaluating the merit of the Aon Hewitt index target-date funds, the defendants could not make a reasoned determination that these funds were prudent or in the best interest of plan participants compared to Vanguard’s target-date funds. “Selecting investment options for plan participants that have no performance history is imprudent,” the complaint states. It also says adding the funds violated the plan’s investment policy statement (IPS).

The defendants are accused of making sure the new target-date funds were seeded with participant assets by mapping those in a removed fund that did not make a new investment election to one of the target-date funds and by making the funds the plan’s qualified default investment alternative (QDIA). “It is well known in the investment industry that when plan fiduciaries eliminate a fund and transfer (or map) the assets to another fund, few 401(k) participants undo that movement because participants rarely make trades in their plan account,” the complaint states.

The plaintiffs attempt to prove their point by noting that as of December 31, 2016, only $975.2 million was invested in the plan’s existing Vanguard target-date funds, but by December 31, 2017, more than $3 billion of the plan’s $3.9 billion in assets (or 77%) was invested in Aon Hewitt’s target-date funds.

The complaint also says at the time of selection, the Aon Hewitt index target-date funds charged up to 33% more than the Vanguard Retirement Trust target-date funds. Based on the amount invested in the Aon Hewitt index target-date funds as of December 31, 2017, participants paid almost $500,000 each year in additional expenses, according to the lawsuit. The plaintiffs add that the Aon Hewitt target-date funds are even more expensive now.

It is also alleged that from their inception, the plan’s Aon Hewitt Index Retirement Solution Funds have significantly underperformed and continue to underperform the Vanguard Target Retirement Trust Plus funds that were removed from the plan. And defendants are also accused of causing the plan to invest in proprietary actively managed Aon Hewitt funds with insufficient performance track records.

According to the complaint, the Schneider Electric defendants exercised their discretionary authority over the plan’s investments in October 2017 by adding to the plan five Vanguard index mutual funds that Aon Hewitt previously removed from the plan. However, the Schneider Electric defendants selected the higher-cost institutional shares rather than the lower-cost Institutional Plus shares that were available and were previously provided to participants with respect to four of the funds.

In addition, the Schneider Electric defendants assessed a separate asset-based “recordkeeping expense” (1 basis point) on the Vanguard index mutual funds, which was paid to Aon Hewitt purportedly for overseeing and monitoring the Vanguard index funds. Participants were not charged a separate asset-based expense when the Schneider Electric defendants provided the lower-cost shares of the index funds prior to 2017.

The plaintiffs also allege a quid-pro-quo relationship between Schneider Electric and Aon Hewitt. They say “it is evident that the Schneider Electric defendants allowed Aon Hewitt to add its proprietary funds to the plan for Aon Hewitt’s interest and not for the exclusive interest of plan participants, and, in return, Aon Hewitt reduced the cost to Schneider Electric of the corporate benefits plans for which Schneider Electric was liable. Following the 401(k) plan’s 2017 fund changes, Aon Hewitt-affiliated entities substantially reduced the expenses charged on Schneider Electric’s corporate pension plans. According to the Forms 5500 for the Coordinated Bargaining Pension Plan, Aon Consulting reduced its compensation for the corporate plan by 31% in 2017, and 70% in 2018, compared to the expenses paid in 2016. For the Schneider Electric Pension Plan—paid for by the company, Aon Consulting reduced its expenses by 38% in 2017, and 79% in 2018, compared to the expenses paid in 2016. The additional revenue that Aon Hewitt collected from the plan’s investment in the Aon Hewitt collective investment trusts more than offset the reduction in expenses charged to the Schneider Electric pension plans. Thus, plan participants subsidized Schneider Electric’s corporate expenses,” the complaint states.

In addition to equitable relief, the plaintiffs are asking the court to order the defendants to:

  • reform the plan to include only prudent investments;
  • reform the plan to obtain bids for recordkeeping and to pay only reasonable recordkeeping expenses; and
  • reform the plan to obtain bids for managed account services and to pay only reasonable managed account service fees if the fiduciaries determine that a managed account services is a prudent alternative to target-date or other asset allocation funds.
Compliance May 29, 2020

Court Finds Plan Sponsor Could Be Found Liable for Retirement Plan Cyberfraud

The plan sponsor had sued plan providers, but the providers in a counterclaim said the plan sponsor was equally liable.

Reported by

Jess Leventhal, The Leventhal Sutton & Gornstein 401(k) Profit Sharing Plan and Leventhal Sutton & Gornstein, Attorneys at Law (LS&G) sued MandMarblestone Group (MMG) and Nationwide for breach of contract, breach of fiduciary duty under the Employee Retirement Income Security Act (ERISA) and negligence related to cyberfraud against Jess Leventhal’s plan account.

LS&G retained MMG as a consulting firm, whereby MMG agreed to design, administer and consult on the plan. Nationwide served as custodian.

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According to court documents, on December 31, 2015, Leventhal withdrew $15,000 from his plan account by completing a withdrawal request form, which is the method prescribed by Nationwide. He emailed the form to MMG, and Nationwide transferred the requested $15,000 to Leventhal. Sometime after that, “unknown criminal(s)” obtained a copy of Leventhal’s original withdrawal form by using an “unknown method of cyberfraud possibly relating to the electronic transmission of that form.” The criminals “posed electronically” as Leventhal’s office administrator and sent fraudulent withdrawal forms to MMG, which appeared to originate from Leventhal’s office email account. These fraudulent withdrawal forms requested that funds be sent to a bank account that did not belong to Leventhal and had not been previously used by him. Leventhal’s account in the plan was depleted from containing more than $400,000 to $0.

The plaintiffs said they obtained documents from MMG that allegedly indicate that MMG was aware of the “peculiar nature” and frequency of these fraudulent withdrawal forms, but did not communicate any of these concerns or observations to the plaintiffs. They also said Nationwide improperly distributed the funds to the bank account that was “fraudulently designated by cyber criminals, even though that account did not actually belong to Mr. Leventhal and had never been authorized or used by him previously.” In addition, the plaintiffs alleged Nationwide failed to authenticate the withdrawal forms and signatures.

The plaintiff said neither defendant implemented the “commonly employed procedures and safeguards” used to notify the plaintiffs of the strange requests and/or verify the authenticity of the requests.

Last May, U.S. District Judge Mitchell S. Goldberg of the U.S. District Court for the Eastern District of Pennsylvania denied MMG and Nationwide’s motion to dismiss as to the ERISA claim, but granted their motions as to the state law claims.

After finding that the plaintiffs sufficiently pled that the defendants are fiduciaries under ERISA, Goldberg found the plaintiffs sufficiently pled the breach of a fiduciary duty by maintaining that MMG and Nationwide failed to act with the requisite prudence and diligence when they saw the “peculiar nature” and high frequency of the withdrawal requests that were to be distributed to a new bank account, but failed to alert the plaintiffs or verify the requests. “Moreover, plaintiffs have averred that defendants failed to implement ‘the typical procedures and safeguards’ used to notify plaintiffs of the strange requests and/or verify the requests,” he wrote in his opinion.

Nationwide argued that the provisions of its agreement with the law firm declaiming liability preclude the plaintiffs’ recovery for breach of fiduciary duty. However, Goldberg said the plaintiffs were correct to respond that such waivers of fiduciary duty are prohibited by ERISA. Under ERISA, “any provision in an agreement or instrument which purports to relieve a fiduciary from responsibility or liability for any responsibility, obligation or duty under this part shall be void as against public policy.” Whether plaintiffs have pled the element of “loss” is not disputed, Goldberg’s opinion noted.

Regarding the two dismissed claims, Goldberg cited Gilbertson v. Unum Life Ins. Co. of Am., which stated, “State law breach of contract claims are pre-empted by ERISA’s express pre-emption clause when the contract breached is considered an employee benefit plan under ERISA.” The judge noted that both the agreement between the law firm and MMG and between the law firm and Nationwide “relate to the plan” because they directly inform and affect the administration of the plan. Thus, the breach of contract claim is pre-empted by ERISA. Goldberg added that because the plaintiffs’ negligence claims also relate to the administration of the plan, these claims are similarly pre-empted.

After the ERISA claim was allowed to proceed, MMG and Nationwide filed counterclaims against the plaintiffs.

They said the plan document itself names LS&G and the plan trustees, including Jess Leventhal, as the plan administrator and named fiduciaries. In addition, according to the agreements between the law firm and MMG and between the law firm and Nationwide, “it was the responsibility of, and within the sole authority of, the named fiduciaries of the plan to authorize and approve the merits of each distribution request and provide the required authorized signature,” the defendants said.

“Plaintiffs’ own carelessness with respect to their employees and their computer/IT [information technology] systems and policies, including their decision to permit [an employee] to work remotely from Texas and use her personal email for official employment duties, permitted the cyberfraud or other criminal fraud to occur. To the extent MMG is liable under ERISA as alleged, Mr. Leventhal, his law partners and the LSG firm, are equally liable in their capacity as the named fiduciaries of the LSG plan,” the defendants further claim.

MMG put forth affirmative defenses which collectively allege that the plaintiffs are proportionally liable for the losses, that the plaintiffs were named fiduciaries under the plan and that plaintiffs’ ERISA claim is “precluded, reduced or set off by [plaintiffs’] respective breaches of fiduciary duty.” Nationwide put forth affirmative defenses for contribution, which likewise sought equitable contribution for the portion of loss alleged caused by the plaintiffs.

Explaining how the court circuits were split on the issue, Goldberg said he was persuaded by the district court authority that allows for claims of contribution and indemnity. And he noted that nothing within the ERISA statute forecloses these types of claims. “Absent contrary precedent from the Third Circuit, I conclude that traditional trust law permits claims of contribution and indemnity to proceed in the ERISA context,” he stated in his opinion. In addition, Goldberg concluded that MMG satisfactorily alleged that the plaintiffs were fiduciaries of the plan and they breached those duties.

However, Goldberg noted that in Trustees of Local 464A United Food & Comm. Workers Union Pension Fund v. Wachovia Bank, N.A. , the district court struck affirmative defenses seeking to bar or reduce the defendant’s liability based on a plaintiff co-fiduciary’s own breaches. The court explained that a plaintiff-fiduciary’s breach of its fiduciary duties would not absolve a co-fiduciary defendant of liability to the plan. In other words, a plaintiff’s breach of its fiduciary duty does not give rise to an affirmative defense of contribution or indemnification, but rather, “could simply give rise to a cause of action to be asserted on behalf of the plan against plaintiffs.” Considering that, Goldberg found that MMG’s and Nationwide’s affirmative defenses—seeking to bar or reduce their liability based on co-fiduciary plaintiffs’ alleged proximate cause of the losses—are legally insufficient.

“While MMG and Nationwide can pursue claims of contribution and indemnity and resolve any issues regarding causation of losses through their counterclaims, they cannot reduce their joint and several liability owed by ERISA fiduciaries for plan losses through the assertion of such affirmative defenses. Therefore, I will grant plaintiffs’ motion to strike MMG’s and Nationwide’s affirmative defenses at issue,” the judge wrote in his opinion.

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