Checksmart Wins Dismissal of 401(k) Excessive Fee Lawsuit

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By Carmen Castro-Pagan

Checksmart Financial LLC defeated a lawsuit accusing it of violating federal benefits law by offering high-fee, poorly performing investment funds in its $25 million 401(k) plan.

The participant’s claim of fiduciary breach against Checksmart and Cetera Advisor Networks LLC are untimely under the Employee Retirement Income Security Act’s three-year time limits provision, Judge James L. Graham of the U.S. District Court for the Southern District of Ohio held July 12.

The proposed class action, filed two years ago by Checksmart employee Enrique Bernaola, made waves in the financial industry for being one of the first to challenge alleged excessive fees in a smaller 401(k) plan. Such lawsuits usually have targeted major companies, including Verizon, Chevron, American Airlines, and Anthem. In recent years, however, companies with smaller plans also have been sued, including Gucci America Inc. ($97 million) and Novitex Enterprise Solutions Inc. ($157 million).

Graham held that Bernaola’s claims were barred by ERISA’s statute of limitations because the expense ratios for the various investment options offered by the plan were disclosed to him three years before he filed his lawsuit.

Between 2012 and 2013, Checksmart disclosed the expense ratios and performance data for each fund in many ways—including in Bernaola’s enrollment kit, a mailed communication, and on its website, Graham said. The three-year limitations period on any potential excessive-fee claims ended by August 2015, but Bernaola didn’t file his claim until July 2016, Graham said.

Graham rejected Bernaola’s arguments that his claim wasn’t untimely, including that actual knowledge of the imprudence of an investment is impossible to have until after the investment underperforms.

Both Bernaola and Checksmart had access to the fees charged, the past performance and estimated risk for each investment option, and warnings that past performance didn’t guarantee future results, Graham said. Bernaola can’t be expected to predict the future, but the same goes for Checksmart, and that’s why his argument fails, Graham said.

Graham also rejected Bernaola’s argument that his claim is timely if deemed as a “process-based” claim. This type of claim would require consideration of both the substantive reasonableness of the fiduciary’s actions and the procedures by which the fiduciary made his decision. For the three-year statute of limitation to apply, Bernaola need not have actual knowledge of the process by which Checksmart selected the investment options; he need only have actual knowledge of the plan’s investment funds, Graham said. To recognize Bernaola’s claim as a process-based claim would essentially erase the limitations period for all fiduciary breach claims, as no participant would be likely to have insider knowledge of their plan’s decision-making process, Graham said.

Goldenberg Schneider LPA and Shepherd Finkelman Miller & Shah LLP represent the worker. Carpenter Lipps & Leland LLP and Goodwin & Procter LLP represent Checksmart. Reminger Co. LPA and Sidley Austin LLP represent Cetera.

The case is Bernaola v. Checksmart Financial LLC, S.D. Ohio, No. 2:16-cv-00684-JLG-EPD, order granting defendants’ motion to dismiss 7/12/18.

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