Red Cross Sued Over Retirement Plan’s Allegedly Imprudent Investment Options, Excessive Fees [UPDATE]

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A consolidated class action complaint claims the American National Red Cross and its benefits plan committee have failed to properly monitor the fees and investment selections in their employee retirement plan.

Per the 61-page consolidated complaint, which ties together multiple proposed class action lawsuits as part of multidistrict litigation, the defendants have breached their fiduciary duties as plan administrators by allowing the plan to be charged excessive recordkeeping, administrative and other fees, and retaining poorly performing target date investment funds as investment options. The case contends that plan participants and beneficiaries would have saved millions of dollars had the defendants properly carried out their duties as prudent fiduciaries in accordance with the Employee Retirement Income Security Act (ERISA).

“Defendants’ breaches of fiduciary duty included failures to act prudently and loyally for the benefit of Plan participants,” the complaint reads. “Plan participants lost tens of millions of dollars in their investment accounts during the class period due to the excessive fees imposed on the Plan and the underperforming Focus Funds. The losses will continue to compound over time because the Plan’s reduced asset base will forego the benefit of compounded earnings.”

The lawsuit claims that billion-dollar “mega” or “jumbo” 401(k) plans such as the American Red Cross Savings Plan maintain “tremendous bargaining power” when it comes to obtaining administrative services at a reasonable cost and “high-quality investment products that provide consistent, stable, and strong performance.” Despite being in a position to obtain “highly competitive rates” for administrative services, the defendants have allowed the plan to be charged excessive fees in comparison to other plans with a similar number of participants and similar asset levels, the case alleges.

Per the suit, the Red Cross knew or should have known that the plan’s recordkeeping fees must be regularly monitored and that competitive bids must be regularly solicited to keep costs low. Nevertheless, after the defendants switched recordkeepers in mid-2017 from Hewitt Associates to Alight Solutions, recordkeeping fees increased, even as the number of plan participants went down, the suit says.

“This strongly suggests that Defendants failed to conduct a proper bidding process at the time of the transition or else turned a blind eye to the resulting increase in fees that would occur after switching recordkeeping providers,” the complaint alleges.

The case claims the fees paid by the plan were “materially higher” than they would have been had the Red Cross engaged in a prudent process. Recordkeeping fees in 2019 rose as much as 103 percent above the average cost of fees paid by comparable plans, the lawsuit says. According to the suit, plan participants would have saved hundreds of thousands of dollars each year—which would have compounded over time—had the defendants secured more reasonable pricing.

The lawsuit goes on to claim that the Red Cross included in its menu of investment options poorly performing Northern Trust Focus Fund target date funds that consistently underperformed industry-accepted benchmarks and similar funds. The fact that the Northern Trust funds underperformed year after year indicates that the defendants failed to properly monitor the investment options, the case alleges.

“The overall breadth and depth of the Focus Funds’ underperformance raises a strong inference that Defendants’ selection and monitoring process was tainted by a failure of competency or effort,” the complaint surmises.

According to the suit, financial services firm Morningstar concluded that the focus funds performed worse than “the vast majority” of all other funds in their category.

The case claims the defendants breached their fiduciary duties by adding the focus funds to the plan in 2017 and failing to remove them following their “chronic underperform[ance].”

“Defendants either failed to examine the relevant data, or chose to ignore what it revealed,” the complaint reads. “Their process of monitoring the Plan’s investments was materially flawed.”

The lawsuit looks to represent participants in and beneficiaries of the American Red Cross Savings Plan at any time from March 2, 2015 through the date of judgment, as well as those who invested in any of the Northern Trust Focus Fund target date funds during that timeframe.

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