City National in Los Angeles and some of its executives face a lawsuit from the U.S. Labor Department that says the company's retirement plan charged employees excessive management fees.
The suit, filed Friday in the U.S. District Court for the Central District of California's western division, alleges that City National flouted its fiduciary duties when it charged a flat percentage on its profit-sharing plan, which would violate the Employee Retirement Income Security Act. Employees lost out on $4 million as a result, the suit says.
Defendants include the executive vice president for human resources, Marianne Lamutt; the chief financial officer, Christopher Carey; Executive Vice President Michael Cahill; and Senior Vice President Michael Nunnelee.
The $32.7 billion-asset City National acted as the fiduciary for its own employees' retirement plan. Erisa stipulates that it charge employees for direct expenses related to administration of the plan. City National instead charged a flat rate, the suit says.
City National "set the amount of its compensation for administering the plan in the same manner calculated to earn a profit as it set its rates for all of its trust and recordkeeping clients," the suit says.
A flat percentage, as City National charged, cannot be considered a direct expense, according to Danielle Jaberg, an Erisa counselor for the Labor Department.
"When you've charged a percentage, there's no way of knowing what the actual expenses are," Jaberg said in an interview. "Not a lot of sophisticated plans do this because it is ripe for abuse."
City National said it plans to fight the suit, which the Los Angeles Times reported on Wednesday.
"Our company is proud of its profit-sharing program for colleagues, and we are deeply committed to making sure it's administered with integrity," City National said in an email to American Banker. "We believe the Labor Department is seeking to apply the law incorrectly, and we intend to vigorously contest its claim."
City National was aware of the issue since at least 2008, according to the suit. The suit cites meeting notes from company's benefits committee in February 2008 that said the service fees could be too high for the retirement plan. From 2008 to 2011, the bank reduced its compensation from the plan. In 2011, the company also began outsourcing management of the retirement plan .
The suit argues that the bank never reimbursed employees for the overcharges, even though it received guidance from Mercer Investment Consulting that suggested companies do not typically profit off of such internal plans.
Jaberg said that the alleged violations were found through a routine investigation conducted by the Employee Benefits Security Administration, the Labor Department agency tasked with monitoring health and retirement plans. The agency issued letters to City National highlighting the alleged violations, and the suit was filed when settlement efforts failed, she said.
She added that only a small percentage of investigations into matters like this result in litigation.
City National, which reported net income of $61.6 million for the first quarter, announced in January that it had agreed to be sold to Royal Bank of Canada for $5.4 billion. RBC declined to comment on the pending litigation.