An appeals court Tuesday upheld most of an earlier judgment in favor of the Department of Labor in its allegation that executives of City National Corp. and City National Bank, Los Angeles, breached their fiduciary duties in the management of a 401(k) and profit-sharing plan.
The DOL, which originally filed suit in 2015, had argued in its complaint that City National Bank, the plan fiduciary, hired its parent to provide record-keeping and trust services "and then charged millions of dollars in compensation that was rubber-stamped by a benefits committee consisting entirely of salaried CNB employees who repeatedly noted the plan's high fees but did nothing to refund years of overpayment to CNB."
In his April 2016 ruling supporting the DOL, U.S. District Judge Terry J. Hatter Jr. in Los Angeles wrote that City National received compensation from the plan "in a mostly automated process without tracking direct expenses or knowing how much direct expenses were required in the plan's operation."
Mr. Hatter had ordered City National "with the assistance of an independent fiduciary, to perform an accounting of all the compensation it received, in the form of mutual fund revenue for the plan, plus lost opportunity cost," according to the April 2016 ruling. On Feb. 8, 2017, the court awarded $7.4 million to the DOL, after it rejected City National's claim the amount of damages should be $1.1 million or nothing. The bank appeals the summary judgment as well as the amount of damages and prejudgment interest.
In the decision filed Tuesday by the 9th U.S. Circuit Court of Appeals in San Francisco, Judge Eduardo C. Robreno wrote that the district court's grant of summary judgment was proper because "the 'reasonable compensation' exemption under ERISA §408(c)(2) does not apply to self-dealing by a fiduciary." The appeals court ruled in favor of the DOL in amount of damages and in favor of City National Corp. regarding prejudgment interest.
"At City National, we're proud of our retirement plan, and we have always been committed to making sure it is administered properly and for the benefit of our colleagues," said a City National statement emailed by spokeswoman Debora Vrana. "We continue to believe we acted appropriately. The fees we charged colleagues were the same as what we charged other plans for record-keeping services."
The statement also said that City National was "considering whether to seek further appellate review of (Tuesday's) ruling."
City National Corp. was acquired by Royal Bank of Canada in November 2015, and City National Bank is now a subsidiary of that bank.