A proposed class action alleges AAA Carolinas has unlawfully flooded its employee 401(k) plan with “extremely expensive, often underperforming” investment options despite possessing the leverage to obtain much cheaper and more lucrative funds.
The 81-page suit alleges Carolina Motor Club, Inc., doing business as AAA Carolinas, the Auto Club Insurance Association, the Auto Club Group and six plan trustees, including AAA Carolinas’ CEO, have run afoul of the Employee Retirement Income Security Act (ERISA) by allowing the 401(k), and therefore its participants, to incur excessive fees, among other damages, as a result of the parties’ “refus[al]” to obtain cheaper funds for more than a decade.
For one, the lawsuit says, the defendants never put the recordkeeping contract for the plan up for a bid to bring in more competitive offers from other service providers. Moreover, the defendants allowed Captrust and Wells Fargo, with the latter serving as both recordkeeper and advisor, to take large amounts of money from the plan and its participants by way of excessive fees and compensation mechanisms, sums “much higher than those warranted by the amount of work these service providers were completing,” the case claims.
“For the entire class period, Defendants neglected their duties and allowed [covered service providers] to make immense amounts of money off Defendants’ own employees,” the suit charges.
According to the lawsuit, the defendants chose to accept the benefits of federal and state tax deferrals for their employees via a 401(k) plan yet have fallen short of ERISA’s standard of care owed to plan participants. The suit makes this claim through the “unique optic” presented by the fact that the 401(k) at issue was originally for the benefit of AAA Carolinas’ employees before the company merged with co-defendant Auto Club Group, thereby merging each entity’s retirement plans. Even though Auto Club Group’s plan was about 15 times larger than AAA Carolinas’ at the time of the merger, it nevertheless had lower administrative costs, the lawsuit says.
Although the defendants had a statutory obligation to avoid saddling the plan with “unjustified costs,” there is no evidence that the parties tried to get lower cost and better performing funds for the plan until at least 2018 or 2019, the lawsuit alleges. For the preceding decade, the case claims, the defendants “continually imprudently limited their Plan participants’ investment choices to high-cost retail share classes” instead of identical lower-cost institutional share classes. When institutional shares were offered, they were the worst-performing of the available options, the suit claims. Per the lawsuit, the only difference between retail share classes and institutional share classes is their fees and other charges. The suit claims the defendants’ restriction of the plan’s investment options to lower-performing, more expensive retail share classes, as opposed to institutional share classes, caused participants to incur increased fees as they attempted to save more for retirement.
Stressed in the complaint is that the defendants’ fiduciaries, as profit-seeking organizations, had no incentive to adopt cheaper funds or a more plan-friendly compensation structure for themselves. Per the case, service providers are often willing to waive the minimum purchase requirements that often come with institutional funds as a way to incentivize their adoption into plans. The lawsuit surmises that it’s possible the defendants had “an incentive to push these higher-cost funds onto Plan participants” because it would allow the plan’s recordkeeper and advisor to charge fees to the participants instead of AAA Carolinas, Auto Club Insurance Association and the Auto Club Group themselves.
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