Posted April 12th, 2018.
By Emily Brill
Law360 (April 12, 2018, 6:03 PM EDT) — Home Depot employees hit the retailer with a $140 million proposed class action in Georgia federal court Thursday alleging the company’s 401(k) plan mismanagement was so severe they would have to work 18 years past the retirement age to recoup all the money lost to fees and bad investments.
The complaint accused Home Depot Inc. of using advisers that gobbled up 1.5 percent of workers’ investments each year, including a robo-adviser that charged 400 percent to 700 percent more than similar products while allegedly running a kickback scheme. The workers also say Home Depot chose funds whose “abysmal” performance should have warned the retailer to stay away, then failed to replace them, all in violation of the Employee Retirement Income Security Act.
“According to [financial information company] BrightScope, the average Home Depot plan participant earned $100,000 less in retirement savings than employees in top-rated retirement plans of a similar size. The $100,000 disparity translates to an additional 18 years of work per participant,” the lawsuit, which represents more than 300,000 workers, stated. “Excessive investment advisory fees, a kickback scheme between Financial Engines and Aon Hewitt, and the plan’s many poor performing investment portfolios all contributed to this sad statistic and robbed participants of their retirement savings.”
Plaintiff Jaime Pizarro, who represents the proposed class along with Craig Smith, said that when he signed up for Home Depot’s 401(k) plan, the retailer directed him to Financial Engines Advisors LLC, a California-based investment “robo-advisor” named as a defendant in the suit alongside Alight Financial Advisors LLC, which owns Aon Hewitt’s benefits administration business, and two Home Depot committees that allegedly oversaw the plan.
Home Depot allegedly talked up Financial Engines at its retirement plan enrollment meetings, directing workers to its website to sign up for one of several “cookie-cutter portfolios” selected via an algorithm based on their age, investment strategy and risk tolerance, employees said. Workers never encountered a human during this process, the suit said.
Thanks to Home Depot’s endorsement, the suit said, Financial Engines made roughly $22 million from Home Depot referrals between 2012 and 2016 while doing “almost nothing to earn these fees” and kicking back a portion to Aon Hewitt, which has worked with Financial Engines on Home Depot’s referrals since July 1.
“Financial Engines kicked back a significant portion of its investment advisory fees to the plan’s recordkeeper Aon Hewitt — on the order of 25 percent to 35 percent,” the suit said. “This kickback was not paid in exchange for any investment services to plan participants and thereby unreasonably increased the plan participants’ investment advisory fees.”
If workers signed up for a portfolio through Financial Engines, between 0.3 percent and 0.5 percent of the money in their 401(k) plans went to the company each year on top of the fees they paid to companies that managed the assets it chose for them, as well as other recordkeeping and administrative fees, according to the complaint.
All told, fees stacked up to the extent that for many participants, their investment options needed to outperform their benchmarks by roughly 1.5 percent annually just for to break even — “a nearly insurmountable task” even if the funds Home Depot chose weren’t struggling, the workers said.
But the funds were struggling, the workers said. Eleven of the 20 options Home Depot selected underperformed their benchmarks, an attorney for the workers, Charles Field, told Law360 on Thursday. Many of these funds had been lagging their competitors for years, he said.
“You can’t really fault somebody if they pick an investment and it does bad for one year, two years. After three years, you have to start wondering, ‘What are they doing?’” Field said in a phone interview. “If you’ve got an investment option that’s underperforming year in and year out and can’t get back to even, I think you ought to be taking that down from your platform. If you don’t, then you’re just hurting your employees.”
One investment option, the JPMorgan Stable Value Fund, had been performing poorly since 2008 and was the subject of a class action that settled for $75 million last year, the complaint said. Another, the Stephens Small Cap Growth Composite, performed worse than 89 percent of small-cap growth options over the five-year period ending in 2018, according to the investment research firm Morningstar Inc.
And a third option, the TS&W Small Cap Value Fund, ate up nearly 1 percent of workers’ 401(k) investments in advisory fees while significantly underperforming its benchmark for the previous one-year, five-year and 10-year periods, the suit said.
“Faced with this evidence of deficient performance, no prudent fiduciary would have retained TS&W to manage the Small Cap Value Fund. But Home Depot did just that,” the complaint said.
The proposed class — a group of more than 300,000 current and former Home Depot employees — said the retailer’s 401(k) plan has lost more than $140 million through its failure to uphold its ERISA-mandated duty of loyalty and prudence to plan participants.
A proposed class of Caterpillar Inc. workers sued Aon Hewitt last year over its ties to Financial Engines, alleging that kickbacks Aon Hewitt accepted from the robo-adviser cost Caterpillar 401(k) plan participants millions and violated ERISA. An Illinois federal magistrate judge threw out the suit in March, saying the workers lacked evidence to support their claims.
A Home Depot spokesperson did not respond to a request for comment on Thursday.
The workers are represented by Paul Jay Pontrelli of Byrne Davis & Hicks PC and by Charles Field, Edward Chapin, David Tracey, Kevin Sharp and Leigh Anne St. Charles of Sanford Heisler Sharp LLP.
Counsel information for Home Depot could not be determined on Thursday.
The case is Pizarro et al. vs. The Home Depot Inc. et al., case number unavailable, in the U.S. District Court for the Northern District of Georgia.
–Editing by Adam LoBelia.