Thousands of small businesses here in South Florida take pride — and rightfully so — in having established 401(k) retirement plans for their employees. Few would dispute that when it comes to retirement savings, what’s good for the employee is good for the small business.
Once a 401(k) is created, it is almost always the owners and officers of these small businesses — with little or no expertise on how to monitor and administer a 401(k) plan — who become their plan’s trustees. As trustees, the law places special duties on these individuals, who often turn to well-known and seemingly trusted financial services companies for help in running their small business retirement plans.
We were involved in a recent class action lawsuit that highlighted an important point. If you are the trustee of a small business retirement plan, you cannot blindly trust your broker to watch over the plan investments. Rather, you should continue to monitor the plan and ask questions of your broker — even those you may think are “dumb” questions.
The lawsuit stemmed from a 401(k) plan established by a Coral Gables-based small business called LAAD Corporation. LAAD is in the business of financing private agribusiness projects in Latin America. The plan trustee, a former CPA, thought the returns on some of the plan investments seemed low. After some searching, he became convinced that the plan had been overcharged. When the LAAD trustees did not get a satisfactory explanation from Merrill, they sought legal advice.
As it turns out, Merrill had just made $79 million in refunds because of its failure to obtain certain mutual fund discounts for its small business retirement plan customers since at least 2006. Mutual funds often attract retirement plan funds by offering these discounts. Without getting too technical, suffice it to say that Merrill did not do what it needed to do to obtain these discounts from the mutual funds. The $79 million was meant to correct this.
Based on the amount of mutual funds it had purchased, however, LAAD’s refund seemed low. And what about the millions of dollars in fees and other profits that Merrill made since 2006 as a result of failing to obtain the mutual fund discounts? Under the Employee Retirement Income Security Act of 1974, or ERISA, Merrill should also be required to “disgorge” those profits to their small business retirement plan customers.
When even LAAD’s lawyers could not get satisfactory responses, the trustees took the bold step of filing a lawsuit on behalf of themselves and about 39,000 other small business retirement accounts at Merrill.
Through the discovery process, the LAAD trustees confirmed that the previous refunds made by Merrill were short by about $9 million. They also learned that by failing to obtain the mutual fund discounts for their customers, Merrill made tens of millions in additional profits.
For its part, Merrill denied any liability and disputed the figures. But the parties did ultimately agree that a settlement was needed. In the end, Merrill returned the extra $9 million to its customers, including interest, and also paid a $16 million “disgorgement” of profits. Even after attorneys’ fees were deducted, class members who had not gotten full refunds received 177 percent of their out-of-pocket losses.
This outcome was unique, to the point where class action experts called it a “unicorn” settlement. As important as the recovery is the fact that the case serves as a cautionary tale to financial services companies that may think that small business retirement plan trustees are too busy to pay attention to their plans.
Among the things that became clear over the course of the lawsuit was the fact that the administration of small business retirement plans is very complicated, even for a large financial services company. Mistakes happen. So if you are a trustee of your small business’ retirement plan, you should routinely do the following:
▪ Monitor the plan’s monthly statements and encourage employees to do the same.
▪ If the statements contain anything out of the ordinary, or even if they are ordinary but you do not understand them, do not be afraid to reach out to your broker and ask questions.
▪ If your broker cannot completely or simply answer your question, seek advice from other professionals.
The great majority of the time, your financial advisor or broker will be able to answer your questions and educate you about the way retirement plans operate. But as the LAAD case shows, if your broker has failed to perform its own legal duties, your questions may uncover something more.
Lawrence A. Kellogg and Jason Kellogg are partners at Levine Kellogg Lehman Schneider + Grossman LLP in Miami. Co-counsel Frank R. Rodriguez and Paulino Nuñez, partners at Rodriguez Tramont Nuñez in Coral Gables, contributed to this article.
▪ This opinion piece was written for Business Monday in the Miami Herald for the ‘My View’ space. It represents the point of view of the writer and not necessarily that of the newspaper.
▪ Have a ‘My View’? If you have a point of view on a business topic you would like to share, consider writing about it for Business Monday. Pitch your idea to rclarke@MiamiHerald.com. Guidelines: Submissions should be around 600 words; should state a topic clearly, with supporting examples; and use examples drawn from South Florida. They should also be accompanied by a photo of the writer, emailed as a jpeg. ‘My View’ submissions that are accepted are published as space allows.