For more than a decade, City National Corp. overcharged its own employees for the costs of administering a key retirement plan and failed to reimburse their accounts after halting the practice, according to a lawsuit filed by the U.S. Labor Department.
The agency said Tuesday that City National and 11 executives and directors also named as defendants allegedly "engaged in self-dealing and conflicted transactions" that led to excessive fees that a 401(k) profit-sharing plan paid to the bank and its affiliates.
"This case is significant because we have a financial institution reaping excessive profits from the plan that its employees participate in," said Crisanta Johnson, Los Angeles regional director for the agency's Employee Benefits Security Administration.
"All of this could have been avoided if the fiduciaries had simply reimbursed themselves in accordance with the law," Johnson said. "Instead, they created a payment scheme that drained plan assets."
The Los Angeles banking firm said the government was misapplying a law governing retirement accounts. The company said that it would contest the allegations vigorously and that, "in the end, we expect to prevail."
City National, the largest bank based in Southern California, said it "is proud of its profit-sharing program for colleagues, and we are deeply committed to making sure it's administered with integrity."
The suit, which seeks to recover $4 million in fees, was filed Friday in U.S. District Court in Los Angeles amid a brewing dispute over a Labor Department proposal to require financial professionals to act as fiduciaries — putting clients' interests ahead of their own — in selling a broad range of retirement products.
The financial industry has opposed the change, saying the fiduciary standard could limit access to financial planners, particularly for retirees of modest means.
Companies that choose to administer benefit programs for their own employees already have a fiduciary duty and aren't allowed to make a profit on the operations — something the Labor Department is accusing City National of doing.
Bank officials said City National's profit-sharing plan enables nearly all of its roughly 3,400 employees to share in corporate earnings. The money is placed into the employees' 401(k) retirement accounts while funds to cover administrative costs are taken out.
All told, the bank was paid about $4 million in the 11 years at issue, the Labor Department said. It said that because City National failed to document the exact time its employees spent operating the program, it was impossible to tell how much of that amount was impermissible profit.
The agency's policy against companies profiting from managing their employees' benefits is long-standing, and the department goes after alleged violators "more often than you might think," said Los Angeles labor lawyer Fred Reish.
Labor Department officials and Reish said that companies are allowed to recover only direct costs of operating retirement plans, including employee hours, legal fees and advice from consultants — but not overhead.
The department insists that any employee hours worked for the plans must be carefully documented, Reish said, though exceptions can be made if the employees spend 100% of their time on the plans.
In the case of City National, the bank didn't document the hours employees spent overseeing the plan, the agency said.
The department said the bank could have avoided the conflict of interest by outsourcing the plan services or reimbursing itself only for actual expenses.
The suit alleges multiple breaches of the Employee Retirement Income Security Act and cites records it says show that City National was aware of problems at least by 2008.
Minutes from a February 2008 meeting of the bank's benefits committee noted that its service fees "may be high for this plan," the suit said. And in October 2010, a report from Mercer Investment Consulting informed the bank that it could retain outside contractors to oversee the plan at less cost than it was charging.
The bank gradually reduced its compensation for running the program from February 2008 to September 2011, but never repaid the allegedly excessive fees to the employees' accounts and never set up a program to track direct expenses, the Labor Department's lawsuit said.
"This is not a widespread issue or problem, but certainly there are companies, including financial firms, that decide to service their own plans," said Danielle Lee Jaberg, a Labor Department benefits lawyer in San Francisco.
"When they do, it's ripe for abuse," Jaberg said. "They are allowed to charge no more than their direct expenses, and the costs must be reasonable."
Separately, in January, City National agreed to a $5.4-billion acquisition offer from Royal Bank of Canada, which said it would expand the L.A. bank's large wealth-management operations.
Royal Bank of Canada declined to comment on the lawsuit.
In addition to City National and its bank subsidiary, defendants in the lawsuit include Marianne Lamutt, executive vice president for human resources; Christopher Carey, the chief financial officer; Michael B. Cahill, executive vice president and general counsel; and Michael Nunnelee, a senior vice president and manager.