The Department of Labor (DOL) has filed a lawsuit in the U.S. District Court for the Central District of California against officers of City National Corp who were fiduciaries of the City National Corp. Profit Sharing Plan. The lawsuit alleges that the plan lost more than $4 million when these officers engaged in self-dealing and conflicted transactions involving plan assets by causing the plan to pay excessive fees to City National Bank and its affiliates.
An investigation by DOL found that through the end of 2011, plan fiduciaries and affiliates received millions of dollars in compensation, commissions and fees at the expense of the plan. Rather than outsource plan services to avoid potential conflicts of interest or reimburse themselves for only direct expenses, the DOL said that City National Bank and other fiduciaries established compensation rates for the plan on par with those charged to the bank’s retail clients — and by doing so, created conflicts that resulted in multiple breaches of ERISA.
These compensation issues were compounded because City National Bank employees were not required to track the amount of time they spent working on plan issues, according to the DOL, which noted that this allowed “large and unreasonable” fees to be charged to the plan. DOL said that proper tracking and monitoring of expenses could have prevented this and limited plan expenses.
A spokesperson for DOL stated: “This case is significant because we have a financial institution reaping excessive profits from the plan that its employees participate in. All of this could have been avoided if the fiduciaries had simply reimbursed themselves in accordance with the law. Instead, they created a payment scheme that drained plan assets.” The employer reportedly will contest the charges.
The Employee Retirement Income Security Act (ERISA) prohibits full-time employees of the plan sponsor (City National Corp.) from receiving compensation for services performed for the plan. They are permitted to be reimbursed their actual expenses in performing services for the plan. A direct expense is one that would not have been incurred but for the service provided to the plan. It does not include an allocation of overhead.
The DOL has approved payments in the following cases:
• compensation attributable to the performance of the services by employees who would not receive full-time compensation were it not for the agreement to provide services to the plan and, absent such duties, would not be employed by the company.
• salary and fringe benefit expenses attributable to employees who performed non-discretionary administrative services to the employer’s plan and who would be terminated were it not for the plan.
While this is only a complaint and nothing has yet been proven, employers should take notice that the DOL does look for potential conflicts of interests and will seek enforcement of the fiduciary rules where necessary to protect plan participants.
The case also serves as a reminder that full-time employees servicing a plan may not be compensated from the plan except for reimbursement of direct expenses actually incurred. Compensation may be permitted to be paid from the plan in the limited circumstances described above where the person would not be employed by the plan sponsor but for the services provided to the plan. In the event such a situation arises, it is recommended that the employer obtain an advisory opinion from the DOL that payment of compensation is permissible. The issue can be avoided entirely by hiring independent service providers to service the plan.