A plan sponsor and plan committee have filed suit, alleging that an advisory firm swindled $1.5 million from a 401(k) plan.
In this case those plan fiduciaries—United Airlines, Inc., United Airlines Retirement Plans Administrative Committee, and the United Airlines Pilot Retirement Account Plan as plaintiffs—filed suit against Keep Safe Investments, LLC (“KSI”), J&K Connect (“J&K”), and Kristi Berge. The suit alleges that the defendants concocted and carried out a “scheme by and among Defendants to obtain control over Plan assets in violation of the governing Plan documents and by fraudulent means, and to improperly use those assets for personal gain.”
SDBA Structure
The activities involved a self-directed brokerage account (SDBA) the plan included as an investment option. To invest there, a participant had to acknowledge that (1) their advisor will only be permitted to withdraw assets from their PCRA to pay advisory fees, and (2) any and all amounts deducted from the PCRA as advisory fees must be for advisory services related to assets in the participant’s PCRA.
The fiduciary plaintiffs said (United Airlines Inc. et al. v. Keep Safe Investments LLC et al., case number 0:23-cv-03426, in the U.S. District Court for the District of Minnesota) that Berge and/or KSI entered into contracts with plan participants, “purportedly to provide investment advice in connection with those participants’ PCRAs.” The participants involved each completed a PCRA Disclaimer, identifying Berge and/or KSI as their investment advisor, authorizing payment of advisory fees from their PCRA, and acknowledging that nothing other than advisory fees related to their PCRA could be paid from their PCRA to Berge or KSI.
But then, “unbeknownst to Plaintiffs, and contrary to the terms of the Plan and PCRA disclaimer, some or all of the participants entered into agreements with J&K (including, in some instances, written agreements), under which the participants agreed to loan assets from their PCRA to J&K.” More specifically, the suit notes that those agreements provided that (1) KSI would charge an amount to the participant’s PCRA, identifying the charge as a “management fee”; (2) the amount charged as a “management fee” would, in reality, be used to fund a loan from the participant to J&K; (3) other than the amount loaned to J&K, KSI would not take any management fee from the participant; (4) the loan to J&K would be for a term of up to five years (unless rolled to a longer term by subsequent agreement of the parties); (5) J&K would pay the participant 10% annual interest on the principal for the duration of the loan; and (6) at the end of the loan period, the principal and all interest would be returned to the participant’s PCRA as a “management fee reimbursement.”
The Discovery
Said another way, “Defendants agreed to an arrangement by which KSI would charge amounts to the Plan (through participants’ PCRAs), representing those amounts to be fees owed for investment advice, when they were instead intended to be used as a loan to J&K. Through this arrangement, and by falsely representing the amounts to the Plan as fees, Berge, KSI, and J&K obtained control over Plan assets to which they were not entitled, with the intent to use those assets for their own gain.”
As for how this all came to light, “On or about December 6, 2022, SRPS, as the Plan’s recordkeeper, alerted United and the Committee that it appeared KSI was charging abnormally high management fees to Plan participants’ PCRAs,” and on the same day Schwab notified KSI by letter that it was being terminated as an investment advisor on Schwab’s platform—including, as relevant to the Plan—for PCRA accounts. They then also notified the participants involved that KSI would no longer be eligible for payments of fees from that account.
‘After’ Actions
United and the Committee subsequently demanded that KSI and/or J&K restore to the Plan any and all fee amounts withdrawn from the Plan as part of any type of loan agreement—and further demanded that KSI return to the Plan any investment earnings generated by those funds while in KSI’s (or any KSI-affiliated business’s) possession—and that they make United, the Committee, and the Plan whole for any damages or costs resulting from any and all loan agreements KSI entered into.
And speaking of that, the suit alleges that, in total, KSI has obtained payment in excess of $1.5 million from the Plan, charged as investment management fees related to Plan participants’ PCRAs. And, having become aware of this “arrangement” with participants, “and the false representations made in order to wrongfully obtain control over Plan assets, United (as the Plan sponsor) has restored to the Plan from United’s general assets funds to make the Plan whole for the injuries suffered as a result of Defendants’ actions…”
So then ultimately, the suit argues:
At the time KSI charged those “fees” to the Plan, KSI, J&K, and Berge each knew that the amounts did not actually represent fees—but they agreed to represent those amounts as fees so they could be distributed from the plan.
As a result, and in reliance on the agreements signed by participants/KSI, plan assets were distributed—giving KSI, J&K, and Berge control over Plan assets.
And that meant the defendants here harmed the Plan, “by obtaining control over assets that belonged to the Plan, and by improperly diminishing the assets held in the Plan’s trust”—and caused further harm when United (as plan sponsor) restored that value to the plan from United’s general assets.”
Stay tuned.
NOTE: In litigation there are always (at least) two sides to every story. However factual it may turn out to be, the initial lawsuit in any action is only one side, and one generally crafted toward a particular result. In our coverage you'll see descriptions of events qualified with statements such as “the suit says,” or “the plaintiffs allege”—and qualifiers should serve as a reminder of that reality.
