Participants in the American Red Cross (ARC) retirement plan have gone to federal court alleging retirement fund fees were not kept below market standards and that returns on investments were subpar. Fund participants claim that they lost millions of dollars, according to a class action complaint filed in the U.S. District Court for the District of Columbia.
On an individual basis, the average participant’s losses due to the plan’s high costs would run to $45,000, it is alleged in the complaint.
“We don’t believe there is any validity to the claims that the American Red Cross 401(k) plan has been mismanaged,” American Red Cross National Headquarters Vice President, Communications Elizabeth Penniman wrote to The NonProfit Times via an email. “To the contrary, we believe that the Red Cross 401(k) plan has been well managed and provides a valuable benefit to our employees. We do not believe any litigation against our plan would have any merit. Plaintiff law firms have been very active in soliciting participants in company 401(k) plans to pursue litigation against plans and employers, and this is part of an uptick in litigation in this area. Many of these lawsuits are without merit.”
According to the complaint, the American Red Cross Savings Plan had a minimum of $894 million under management during the class period, March 2, 2015 through the date of judgment. At the end of 2018 the plan had more than $1 billion in assets under management, which had increased to $1.2 billion by the end of 2019, the complaint alleges.
It is unclear how much of the increase was due to employee and employer contributions during the year. According to the complaint, employees may contribute between 1% and 50% of their annual contribution on a pretax basis to the plan, with the ARC matching contributions up to 4% of the employee’s compensation. The plan had no fewer than 22,000 participants at any point during the class period.
A plan of that size would be considered a “jumbo plan,” according to the complaint, which would give fiduciaries significant leverage regarding fees and expenses levied against it. The plaintiffs allege the defendants, including the ARC, its board of governors, its benefit administration committee and various John Does, neither attempted to reduce plan expenses nor scrutinized investment opportunities to ensure they were prudent.
The plaintiffs also claim costs for the Red Cross plan were among the highest for plans with assets of more than $500 million, and that these costs increased in 2016 after the defendants changed administrative service providers, despite fees traditionally decreasing as economies of scale, vendor competition and negotiation leverage factors come into play. They further allege resources were steered into higher-cost branded investment properties.
The plaintiffs acknowledge they do not have specific knowledge of the defendants’ decision-making process regarding the plan because that information is in the possession of the defendants and has not yet been subject to discovery.
The plaintiffs are seeking restoration of what they consider to be the high administrative fees as well as unrealized profits they believe they have lost.
Diana F. Tracy, David E. Bagenstose, Jason L. Richard and Stacy M. Moxley lead the plaintiff class. The plaintiffs are represented by Christopher Martini Battista of the Law Office of Christopher M. Battista, Fairfax, Va.; Mark K. Gyandoh and Gabrielle Kelerchian of Capozzi Adler PC, Merion Station, Pa.; Donald Reavey of Capozzi Adler PC, Harrisburg, Pa.; Jon Lambiras and Todd S. Collins of Berger Montague PC, Philadelphia; Daniel J. Walker, of Berger Montague, Washington, DC and Eric Lechtzin, of Edelson Lechtzin LLP, Newtown, Pa.
The defendants are represented by Michael Joseph Prame and William James Delaney of Groom Law Group, Washington, DC.
The case is Tracy et al v. American National Red Cross et al, case number 1:21-cv-00541-EGS.