ERISA Update - Leber v. Citigroup, Inc. and Gipson v. Wells Fargo & Co.

Several months ago, in an ERISA Advisory dated September 6, 2007, we reported on the recent wave of cases challenging allegedly excessive fees paid by participant-directed individual account plans.  Since that Advisory was issued, two more ERISA actions have been filed against financial institutions claiming that they breached their fiduciary duties and engaged in prohibited transactions by providing services and investment products to their own in-house 401(k) plans.  While we are not ready to characterize these cases as a new “trend,” we do think they are significant enough to warrant an update.

In Leber v. Citigroup, Inc., a participant in the Citigroup 401(k) Plan brought an ERISA action on behalf of herself and a putative class of approximately 187,000 participants alleging that the Plan sponsor and related fiduciaries breached fiduciary duties and engaged in prohibited self-dealing in selecting investment products and services provided by Citigroup and its affiliates for the Plan.  The lawsuit was filed in the US District Court for the Southern District of New York on October 18, 2007 as Case No. 07 CIV 9329 (SHS). 

The defendants in the case are Citigroup, Inc. (Plan sponsor and party in interest), the Plans Administrative Committee of Citigroup Inc. (Plan Administrator and fiduciary), the 401(k) Plan Investment Committee (fiduciary with co-responsibility for selection, monitoring and evaluation of Plan investment options), and individual members of the two Committees.  The Complaint challenges (1) the selection of  investment products (mutual funds, GICs, and a stable value fund) offered by Citigroup-related entities and (2) the purchase of trustee and record-keeping services from Citigroup-related entities.  The Complaint alleges that the Plan could have paid lower fees and reaped greater investment returns had the defendants instead chosen investments and service providers unaffiliated with Citigroup.  The defendants allegedly put Citigroup profits ahead of the Plan’s interests, thereby causing the Plan to lose millions of dollars.

The Complaint is divided into three Counts.  Count I is an ERISA prohibited transaction claim alleging that the Committee defendants violated ERISA §§ 406(a)(1)(A) and (C) (prohibiting any sale or exchange with a party in interest, and any provision of services by a party in interest), and 406(b)(1) and (2) (prohibiting any fiduciary self-dealing and conflicts of interest) by causing the Plan to choose products and services provided by Citigroup subsidiaries and affiliates.  These transactions allegedly caused the Plan to pay millions of dollars in investment management and other fees that were prohibited by ERISA, and to suffer millions of dollars in losses annually.  The plaintiff seeks from the Committee defendants restoration of the Plan’s losses and profits earned by Citigroup on fees paid to Citigroup and its subsidiaries and affiliates.

Count II alleges the Committee defendants breached their duties of loyalty and prudence under ERISA § 404(a)(1)(A) and (B) by causing the Plan to invest in Citigroup affiliated funds.  The plaintiff alleges that the Committee defendants “put Citigroup’s financial interests ahead of the 401(k) Plan’s interests” by causing the Plan to make such investments, to purchase products and services from Citigroup subsidiaries and affiliates, and to pay investment management and other fees to Citigroup entities.  Count II seeks payment of millions of dollars of damages arising from payment of Citigroup fees and inferior investment returns.

Count III is a claim against Citigroup Inc. as a party in interest for participating in and abetting the violations alleged in Counts I and II.  Under ERISA § 502(a)(3), the plaintiff seeks disgorgement of “all revenues received from the 401(k) Plan and Citigroup’s earnings thereon.”

Gipson v. Wells Fargo & Co. was filed on November 1, 2007 by the same law firm that filed Leber and involves similar allegations and claims.  The plaintiff in Gipson is a participant in the Wells Fargo & Company 401(k) Plan.  As in Leber, the plaintiff in Gipson brought suit on behalf of herself and a putative class of approximately 164,000 participants against Wells Fargo and related fiduciaries alleging they breached fiduciary duties and engaged in prohibited self-dealing in selecting for the Plan investment products and services provided by Wells Fargo and its affiliates.

The defendants in the case are Wells Fargo & Company (Plan sponsor and party in interest), the Employee Benefit Review Committee (a fiduciary with responsibility for selecting investment options and service providers for the Plan), Wells Fargo Bank, N.A. (the Plan Trustee and a fiduciary), and unidentified individual fiduciaries and parties in interest with respect to the Plan.  The plaintiff challenges the selection of mutual funds established, offered and advised by a Wells Fargo affiliate or subsidiary, and the purchase of trustee services from Wells Fargo.  The Complaint alleges that Wells Fargo investment products and service providers were chosen to generate fees for Wells Fargo, and that the investments under-performed.  The plaintiff seeks millions of dollars of losses to the Plan.

The Complaint in Gipson is divided into four Counts.  Count I asserts a prohibited transaction claim under ERISA §§ 406(a)(1)(A) and (C) and 406(b)(1) and (2) against the Benefit Review Committee.  The plaintiff seeks restoration of all losses to the Plan and profits earned by Wells Fargo on fees paid.  Count II asserts a breach of fiduciary duty claim under ERISA §§ 404(a)(1)(A) and (B), against the Committee, and seeks restoration of alleged losses to the Plan.  Count III alleges a co-fiduciary liability claim under ERISA § 405(a)(1) against Wells Fargo for participating in and failing to remedy the breaches of fiduciary duty and prohibited transactions alleged in Counts I and II.  Count III seeks restoration of all losses to the Plan caused by the Bank’s fiduciary breaches.  Count IV asserts an ERISA § 502(a)(3) claim against Wells Fargo, as a party in interest, for its participation in the alleged breaches of fiduciary duty and prohibited transactions.  Count IV seeks disgorgement of “all revenues received from the 401(k) Plan and Wells Fargo’s earnings thereon.”

In addition to Leber and Gipson, at least three other ERISA actions have been filed against financial institutions challenging their provision of services and investment products to their own in-house 401(k) plans.  The other cases are Boeckman v. A.G. Edwards, Inc., 3:05-cv-00658-GPM-PMF (S.D. Ill.), Nolte v. CIGNA Corp., 2:07-cv-02046-HAB-DGB (C.D. Ill), and McCullough v. Aegon USA, Inc., 06-cv-0068-LRR (N.D. Iowa).  The complaints in all of these cases generally allege not only that the defendant financial institution caused or allowed its 401(k) plan to pay excessive fees for services, but also that the arrangements between the financial institution and its in-house plans violate ERISA’s prohibited transaction rules.

In the wake of these ERISA actions, financial institutions may wish to have their compliance departments review any arrangements involving the provision of services or investment products to their own in-house plans.  There is an administrative class exemption, PTE 77-3, 42 Fed. Reg. 18734 (April 8, 1977), that provides ERISA §§ 406 and 407(a) relief for the acquisition or sale of shares of a registered open-end investment company by an in-house plan covering only employees of the mutual fund, the fund’s investment advisor, its principal underwriter or an affiliate of such persons, provided that the terms and conditions of the exemption are met.  Another administrative class exemption, PTE 79-13, 44 Fed. Reg. 25533 (May 1, 1979) provides comparable relief for the acquisition, ownership or sale of shares of registered closed-end investment companies by in-house plans covering only employees of the investment company, its investment advisor or an affiliate of the company or its advisor, provided that the terms and conditions of the exemption are met.  A financial institution that provides services to its own in-house plan may be reimbursed for its direct expenses in accordance with ERISA § 408(c)(2) and the regulations promulgated thereunder.

Financial institutions also are subject to the generalized fiduciary duties set forth in ERISA § 404(a) in selecting service providers and investment products for their own in-house plans, in particular the prudence and loyalty obligations set forth in that section.  For purposes of selecting investment options for a participant-directed plan, the Department of Labor has construed these duties to require fiduciaries to engage in “an objective, thorough and analytical process that involves consideration of the quality of competing providers and investment products, as appropriate,” as well as “investment fees and expenses.”  See Default Investment Alternatives under Participant Directed Individual Account Plans, 72 Fed. Reg. 60451, 60453 (Oct. 24, 2007).  The Department also has indicated that fiduciaries must engage in a similar process in selecting plan service providers.  See EBSA Field Assistance Bulletin No. 2007-01 (Feb. 2, 2007).

For more information on ERISA legal issues contact Eric Serron, Paul Ondrasik, or Melanie Nussdorf  at 202.429.3000.