Ninth Circuit Holds that Bank Violated ERISA by Setting its Own Recordkeeping Fees
On April 23, 2019, in Acosta v. City National Corporation, a panel of the U.S. Court of Appeals for the Ninth Circuit held that City National Corporation and other defendants (City National) violated ERISA by engaging in prohibited self-dealing. As background, City National Corporation sponsors a defined contribution plan and its subsidiary, City National Bank (CNB), serves as the plan’s trustee and record-keeper. As the plan’s record-keeper, CNB received compensation through revenue sharing. CNB also served over 200 other ERISA plans in this capacity.
The DOL brought this case against City National, alleging that they had violated ERISA’s prohibition against self-dealing. Specifically, they argued that CNB had set and approved their own compensation and had failed to maintain a system for tracking how much time its employees actually spent servicing City National’s plan versus other plans. The District Court granted summary judgment in favor of the DOL and the Ninth Circuit affirmed that decision.
In their ruling, the Ninth Circuit affirmed the idea that self-dealing cannot be overcome by claiming the reasonable compensation exemption provided in ERISA. In other words, where a fiduciary engages in self-dealing, it is not enough that the fees that are paid under the arrangement are for reasonable compensation for services. Instead, in this case, the fees paid to CNB were self-dealing, and they needed to be able to prove that the fees were paid in direct compensation for services actually rendered to this plan. This would allow them to offset those amounts against the damages assessed for the self-dealing.
Unfortunately, in this case, the court found that CNB had not actually met their burden of proof in showing that the fees paid directly correlated to the services offered to the plan. They could not prove that CNB employees had directly spent certain time completing tasks for this plan. Instead, all they could provide was a generalized report based on an average of all fees paid to CNB by all the plans they serviced. As such, the court found that they were liable for damages for their self-dealing.
While the case was remanded to the District Court to determine the exact amount of damages, this case presents a warning to plan sponsors. Where fiduciaries of the plan are also offering services to the plan for a fee, it’s important that they keep accurate records of the services that are offered so that they can accurately offset any damages that could be imposed because of self-dealing. Importantly, plans should also consider whether other arrangements need to be made to avoid self-dealing, or whether an independent fiduciary should be called upon to determine fees paid to a fiduciary.