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Suit Says Casino 401(k) Rolled the Dice with Plan Assets

Litigation

A plan fiduciary—and their outsourced investment consultant—are being sued for a “self-serving” fund swap that is alleged to have cost participants more than $100 million to date.

This time it’s plaintiff Maggie Thomson[i] (on behalf of some 42,000 participants in the $1.4 billion Caesars Entertainment Corporation Savings & Retirement Plan), suing both the fiduciaries of that plan and Russell Investment Management LLC. Why Russell? Well, according to the suit, “Russell obtained control of the Plan’s investment menu in 2017 and promptly filled the Plan with its own poorly performing proprietary funds.” 

The suit (Thomson v. Russell Inv. Mgmt. LLC, D. Nev., No. 2:21-cv-00961, complaint 5/19/21) goes on to describe Russell’s “gambit” as “a life preserver for its struggling funds,” which brought $1.4 billion in new investment “at a critical time when other plan sponsors were leaving Russell’s funds.”

More specifically, the plaintiff claims that this “deal did not promote the interest of Plan participants,” since she claims that the plan “already had in place a menu of leading funds that consistently outperformed Russell’s funds at similar or lower levels of risk.” She goes on to claim that “Russell’s self-serving swap has been disastrous for the Plan and cost participants more than $100 million in lost investment earnings to date.” 

Outsourced Outcomes

The suit claims that in the fallout from the leveraged buyout of the company in 2008 by private equity firms and resulting bankruptcy, “plan participants have struggled to build their nest eggs,” going on to note that the company’s owners eliminated matching contributions for three straight years and brought them back at “anemic” levels[ii] until well after the company emerged from bankruptcy and related litigation in late 2017. In response to “the company’s unsustainable LBO debt,” the suit says that “unloading Plan responsibilities to a ‘fiduciary outsourcing’ provider like Russell was an attractive option,” and that Russell took over control of the Plan’s investment menu in 2017 “as a fractured Caesars was divvied up among creditors.”

Not that, according to the plaintiff, was there a need to make changes. The suit claims that the plan offered “leading, low-cost investment funds, including age-based balanced options managed by State Street with long track records of success.”[iii] But—according to the suit, “instead of prudently and objectively evaluating the Plan’s needs, Russell transferred all of the Plan’s $1.4 billion in assets[iv] to its own proprietary funds, including more than $1 billion to its fledgling age-based funds”—fund that they said “had yielded disappointing results and lost or were soon to lose other key investors (including Russell’s own employee plan).” 

The suit refutes the notion that participants benefited from the move, noting that “over short and long periods prior to the transfer, the existing options, on balance, performed better at similar or lower levels of risk. The deal was a boon to Russell, however, which was able to add $1.4 billion in new investment to help prop up its funds at a difficult time for the funds.” Moreover, what they suit calls a “longshot bet” didn’t pay off—and that as a result, “the plan has suffered more than $100 million in lost investment returns to date as a result of Russell’s replacement of the Plan’s funds with Russell funds.”

‘Lose’ Lips?

The suit claims that after hitting a high mark around 2013, Russell started to lose investors in its age-based funds, and assets in the funds started to decline—that between year-end 2013 and year-end 2016, the funds’ reported assets decreased by 20%, even as the underlying investments returned an average of 3%-4% per year. “The 20% drop represented significant net outflows from investors—including Russell’s own employee plan. Russell withdrew around $130 million of its own plan assets from the funds in 2016,” according to the suit. It goes on to state that during 2017, four additional fiduciaries, representing twelve plans and over $450 million invested in Russell’s age-based funds, pulled their investments—nearly half of the funds’ remaining investors at year-end 2016, and more than one-third of the assets. 

The Plan’s assets offered what the plaintiff termed a “life preserver,” claiming that “without $1 billion in new investment in its age-based funds from the Plan, Russell would have suffered a further 25% decrease in reported assets in the funds by year-end 2017.” Since then, the suit notes that two additional fiduciaries representing six plans pulled their investments from Russell’s age-based funds in 2018 and 2019—leaving the Caesars’ plan “holding a critical 74% of the reported assets in Russell’s age-based funds as of the end of 2019.”

Conflict ‘Ed’?

However, the plaintiff here wasn’t just suing Russell Investments—acknowledging that “outsourcing fiduciary control of an investment menu is not a breach standing alone, Caesars had a duty to act prudently in the process of delegating investment authority and monitoring its selected provider.” And in view of what the suit alleged were “Russell’s conflict of interest in selecting its own funds and the inferior track record of the Russell funds relative to the Plan’s existing menu, it does not appear that Caesars prudently reviewed Russell’s investment plan prior to retaining Russell or surveyed Russell’s actions after Russell assumed control.” Beyond that, the suit notes that, “as losses piled up, Caesars should have monitored Russell’s ongoing poor results and removed Russell. In all of these respects, Caesars failed to live up to its own fiduciary obligations.”

Worth noting is that the plaintiff here is represented by Nichols Kaster PLLP and Paul Padda Law PLLC—the former having taken on a number of these type lawsuits, including M&T BankMFSSEIJohn Hancock Lowe’sPutnam Investments,Oklahoma’s BOKF NA and Goldman Sachs, as well as suits involving Deutsche Bank Americas Holding Corp.BB&T and American Airlines.

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.


[i] According to the suit, Thomson is a current participant in the Plan, and has been a participant since 2014, and she was invested in the State Street age-based fund for her age group until 2017, when the State Street option was removed from the Plan and her account was transferred to Russell’s competing age-based fund. 

[ii] According to the suit, the company stopped making Plan contributions in 2009 and did not resume for more than three years, and when they did resume, the 50% match was subject to a $600 cap per person per year.

[iii] The suit alleges that fiduciaries of at least 25 ERISA-covered defined contribution plans with more than $1 billion in assets retained the State Street age-based series as of the end of 2016, but that “no such plan with more than $1 billion held Russell’s age-based funds at that time.”

[iv] The suit claims that Russell’s affiliated funds continue to make up 100% of the Plan’s investment options, and that around 75% of the Plan’s assets are invested in Russell’s age-based funds. 

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