Suit Says Retirement Account Sweep Rates Unreasonable

A new suit claims that the interest rates paid on Merrill Edge retirement accounts have lagged market trends and fallen short of the “reasonable” rates they claim to provide.

The suit was brought by one Margaret McCrary, who has filed a class action suit for breach of contract on behalf of herself and a Class of persons or entities who maintained Merrill Edge retirement accounts at any time beginning March 17, 2022.

The suit claims that at the time she opened her Merrill Edge IRA market interest rates were essentially zero—and thus she “did not consider it unusual that her Merrill Edge account (tier 2) paid interest on her sweep balance of 0.01%.” That said, the suit notes that she “maintained an online savings account at Flagstar Bank and other brokerage accounts at Fidelity Investments, and through those accounts was able to monitor interest rates.” More specifically, the suit notes that, “beginning in March 2022, when Fidelity and Flagstar started to raise the rates they paid on cash, Plaintiff continued to monitor her Merrill account expecting Merrill to raise its interest rate on tier 2 as well.” That said, and as one might guess from the premise of this litigation, they didn’t.

RASP Rates

“At a time when interest rates generally were increasing in conjunction with increases to the Federal Funds rate, Merrill kept RASP interest rates unreasonably low,” according to the suit. “For example, RASP rates ended 2022 at 0.01% (tier 1), 0.01% (tier 2), 0.30% (tier 3), and 1.06% (tier 4), and did not rise at all in 2023.” And so, in March 2023, after Merrill failed to increase rates, Plaintiff transferred her Merrill IRA to Fidelity.

The suit acknowledges that the allegations are “based on information and belief, except where the allegations specifically identify documents on which the allegations are based or Plaintiff’s personal knowledge of facts. Plaintiff’s information and belief is based on the investigation of her counsel, including the review of materials on Merrill Lynch, Pierce, Fenner & Smith, Inc. (‘Merrill’)’s websites (www.ml.com, www.merrilledge.com, and www.mymerrill.com), historical materials available on the internet; materials on competitors’ websites; media reports; interest rate data compiled by Curinos, a subsidiary of Informa plc, and by Crane Data; stock analyst reports concerning sweep rates; Securities and Exchange Commission (‘SEC’) releases, rules, and regulations; Financial Industry Regulatory Authority (‘FINRA’) rules and regulations; and New York Stock Exchange (‘NYSE’) rules and regulations.”

Reasonable Rate(s)

Now, the suit explains that Merrill requires that each Merrill Edge client agree online to the Merrill Edge Self-Directed Investing Client Relationship Agreement (“CRA”), which describes Merrill’s “Sweep Program” with Bank of America, N.A. (“BANA”), a Merrill affiliate, and states that “[t]he interest paid on retirement account assets will be at no less than a reasonable rate.” 

The suit acknowledges that “the term ‘reasonable’ is not defined explicitly in the CRA or IRA Agreements,” but that—"based on its ‘ordinary meaning’ (using Webster’s and Oxford dictionary definitions), ‘reasonable’ is synonymous with ‘fair market value’ and can be determined using a market approach of comparable instruments.” Said another way—it’s “the rate that would result in a competitive market under fair market valuation conditions, i.e. a rate parties would agree to in an arm’s length transaction where neither party was able to exert market power over the other.” And the suit then proceeds to document a number of points[i] of comparison—drawing a specific comparison to Fidelity that had declared in a press release that Fidelity’s approach in offering high yields on cash balances “is contrary to typical industry practices of defaulting customers’ cash into a low-yielding product—often at an affiliated bank—with no other option in what the industry calls a ‘cash sweep.’”

Conflict of Interest(s)

In contrast, the suit alleges that “banks such as Merrill, and other banks that swept cash to affiliated banks, who had a conflict of interest and profited from paying low rates, continued to pay low rates of interest on FDIC-insured sweep accounts.” In fact, the suit claims that “this conflict of interest is widespread across the retail brokerage industry and gives rise to the prohibitions of affiliated brokerage sweep deposits under the IRC and ERISA.”

In essence, “Merrill pursued a pricing strategy to maximize profits. The sweep rates were set by BANA unilaterally in a manner that was inconsistent with the fair market value standard and so are not presumptively reasonable rates.”

The claims for breach of contract are asserted on behalf of a national Class, under New York State law (based on a choice of law provision in the CRA). She is seeking “both monetary recovery commencing on March 17, 2022 and declaratory and injunctive relief. Merrill is committing an ongoing wrong. Accordingly, the class period for which plaintiff seeks relief is ongoing and includes continuing and future retirement account investors.”

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.