The lawsuit is brought on behalf of a class of approximately 200,000 similarly-situated Home Depot retirement plan participants, and it seeks $140 million in damages. Two hundred thousand is a lot of people, but in 2017, 31.1 million Americans participated in an ERISA retirement plan. The Home Depot problem, as big as it is, may be only the tip of the iceberg.
Basic Fiduciary Duty
Under ERISA, those who manage retirement plans -- in this case, The Home Depot, Inc., and the Administrative and Investment Committees of The Home Depot FutureBuilder 401(k) Plan -- have a duty to manage plan assets for the exclusive benefit of plan participants. In addition, plan fiduciaries are required to act with reasonable care, skill, diligence and prudence in the discharge of their duties.
These two provisions, the “exclusive benefit” and the “prudent man [person]” rule, are the source of most ERISA lawsuits. Complying with those rules is harder than one might imagine. The plan assets under management and the fees to be made from managing them can be considerable. Where there’s big money, there are temptations.
Poorly performing investment options
One of the incentives for employees to save for retirement through a 401(k) plan is the opportunity to “play the market” by choosing among investment options selected by plan fiduciaries. People who work the overnight shift can be investors, too.
Lost from the dialog is the fact that, with a 401(k) plan, participants bear the risk of market fluctuations. In old-fashioned defined benefit retirement plans, that risk was borne by the employer (or union fund) which guaranteed a certain payment at retirement. The big story in the growth of 401(k) plans is the shifting of risk away from those with deep pockets to workers with fewer resources and more to lose.
In any event, although 401(k) plan fiduciaries are not on the hook for investment performance, they must select a suitable array of choices so that plan participants can benefit from having taken on this additional market risk. Workers have to have some good investment options.
The complaint alleges that The Home Depot 401(k) plan administrators, instead, “loaded the Plan with several poorly-performing investment options,” and “failed to remove them despite years of deficient performance.” They failed to live up to their duty to act with reasonable prudence.
Unreasonable Fees for “Cookie-Cutter” Investment Advice
For an additional fee, Plan participants were offered extra, ostensibly personalized, financial advice by Financial Engines Advisors, LLC and Alight Financial Advisors, LLC, which also operated as Aon-Hewitt Financial Advisors. The complaint alleges that the fees were exorbitant, especially given the fact that the advice was generated through the application of a mathematical formula based on age, income, etc. Robo-advice, it required no human intervention, at all.
The services also duplicated services already offered by some of the investment funds. What participants paid for with this extra layer of investment advice was a waste of money. It was junk. It depleted their account balances, while adding to the “investment advisors’” bottom line.
A Kickback Scheme
Financial Engines Advisors also paid a significant portion of its investment advisory fees, as much as 25 to30 percent, to the plan’s record keeper, Aon-Hewitt, aka Alight Financial Advisors. Yes, this does seem like the same entities showing up on both sides of the deal.
This complicated financial scheme is described in the complaint as a kickback. It was not for any additional investment services to the plan. This fee also increased the cost to plan participants and thus decreased the funds available in their retirement savings. Home Depot savers appear to have been cash cows, making Aon-Hewitt wealthy.
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Plan Participants Ended Up Considerably Less Well-off Than They Would Have Been Absent Misdeeds
This is the heart of the complaint, and it will also be the hardest to demonstrate because it requires a foray into the world of what could have been if Plan participants had had better investment options and not been the target of potentially predatory self-dealing on the part of financial advisors.
Plaintiffs’ attorneys offer considerable statistical comparisons with the performance of other investors through other investment funds during the same period of time. This will likely be more fully developed at trial.
What’s the big picture for ERISA lawsuits? Retirement plan participants must, more than ever, look past the glossy brochures and smooth investment talk to police what is happening with their retirement savings.