Trader Joe’s Retirement System Hit with Lawsuit Alleging ERISA Breaches

Ex-participants of the popular food chain’s retirement plan bring allegations of ’dramatic’ pains.

Ex-participants of the $1.6 billion Trader Joe’s Company Retirement Plan are suing fiduciaries of the system for allegedly breaching their Employee Retirement Income Security Act (ERISA) duties to plan participants through poor handling of the “management, operation, and administration of the plan.”

Specifically, the plaintiffs asserted Trader Joe’s breached its fiduciary duties by failing to mitigate the “excessive fees” charged to the plan by Capital Research & Management Co., the plan’s recordkeeper, subsequently costing the plan millions of dollars, the plaintiffs asserted in a court filing.

“The impact of excessive fees on employees’ and retirees’ retirement assets is dramatic,” the court filing said. The US Department of Labor noted that a 1% higher level of fees over a 35-year period makes a 28% difference in retirement assets at the end of a participant’s career.

The court filing says Trader Joe’s sidestepped its “tremendous bargaining power” granted to it by its scale in assets under management by “inappropriately” choosing relatively expensive mutual fund share classes, causing the plan to pay unreasonable and excessive fees for recordkeeping and other administrative services.

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“Over the past six years, the plan paid the following recordkeeping fees in the amount of roughly $140 per participant,” the plaintiffs said. “A reasonable recordkeeping fee for the plan is $40 per plan participant.”

It’s a clear breach of the strict fiduciary duties of loyalty and prudence to cover retirement plan fiduciaries implemented by the ERISA law, the lawsuit alleges. An ERISA fiduciary must act “with the care, skill, prudence, and diligence” in the best interest of plan participants and beneficiaries. 

Even though Trader Joe’s has not disclosed to plan participants the precise amount of fees Capital Research collects from the retirement plan, “even with limited information…it is apparent that Capital Research’s fees and compensation is excessive,” the filing said.

This is in part to the payment scheme Trader Joe’s and Capital Research agreed upon, which is an asset-based revenue-sharing arrangement. The arrangement “bear[s] no relation to a reasonable recordkeeping fee and can provide excessive compensation. Additionally, Trader Joe’s offered to pay with retail investor share classes, rather than less expensive institutional class shares,” the suit alleges.

Trader Joe’s did not respond to media inquiry by press time.

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Canadian Defined Benefit Plans Surge at End of 2019

Rising bond yields, strong asset returns bring funded ratio to near all-time high.

The funded ratio of Canadian defined benefit pension plans surged in the fourth quarter of 2019 to a near all-time high of 102.5%, thanks to rising bond yields and a late-year equity rally.

According to professional services firm Aon, its Median Solvency Ratio, which measures defined benefit plans’ financial health by comparing assets to liabilities, was up 7.2 percentage points in 2019.

The sharp increase in funded levels was attributed to Canadian bond yields, which rose during the quarter. The Canada benchmark 10-year yields were up 33 basis points, and the Canada benchmark long-bond yields were up 23 basis points. Because higher yields decrease plan liabilities, they had a positive impact pension solvency during the quarter.

At the same time, the funded levels were also boosted by strong returns on assets for pensions, which was 1.9% in the fourth quarter. That brought the overall return on assets for the year to a robust 15.9%.

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“Financial markets began 2019 still recovering from a rocky year, and equities climbed a wall of uncertainty throughout much of the year,” Erwan Pirou, Aon’s Canada CIO, said in a release.

Pirou said, however, that the firm is “not so confident” the renewed optimism will continue in 2020 as “global growth remains a headwind to stock valuations, and the forces driving a reorientation of global trade and other economic relationships are still in play, suggesting more volatility ahead.”

Aon reported that all equity classes, in Canadian dollar terms, had positive returns during the fourth quarter and for the year. During the final quarter, the MSCI Emerging Markets index was the top performer, increasing 9.5%, followed by the US S&P 500, the global MSCI World index, the international MSCI EAFE index, and the Canadian S&P/TSX composite, which rose 6.8%, 6.3%, 5.9%, and 3.2% respectively.

For the year, the US S&P 500 was the top performer, rising 24.8%, followed by the Canadian S&P/TSX (22.9%), the global MSCI World (21.2%), the international MSCI EAFE (15.9%) and the MSCI Emerging Markets (12.4%).

Aon said that because of the financial strength of Canadian pension plans, plan sponsors may want to consider risk mitigation strategies for 2020.

“Plan sponsors need to separate recent events from long-term trends, and that’s nowhere more applicable than when it comes to bond yields,” said William da Silva, a senior partner at Aon. “Strong solvency positions give plan sponsors an opportunity to put all of their options for managing volatility and risk on the table, from diversification and outsourced investment solutions to full settlement of liabilities.”

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