401(k) Contributors of Caesars can Continue Litigation Against Russell Investments
A lawsuit brought by employees of Caesars Entertainment (CZR) against their 401(k) manager, Russell Investments, can move forward. A federal judge in Nevada has ruled that the majority of the complaint has enough substance to be pursued.
Earlier this week, Judge Cristina Silva rejected Russell's motion to dismiss, stating the plaintiffs provided enough evidence to suggest that the investment manager breached its duty of loyalty.
The plaintiffs argue that when Russell Investments Trust Company (RITC) took over management of Caesars' 401(k) in 2017, it moved the retirement plan's investments to options managed by RITC. They claim these new options were lackluster compared to previous offerings and were unpopular with Caesars employees.
According to the Employee Retirement Income Security Act (ERISA), retirement plan managers have a duty to act in the best interest of plan participants.
To make a claim of disloyalty, a plaintiff must present factual evidence that supports an assumption that the defendant acted for their benefit or someone else's, as per the ruling in the Global Invs. U.S. LLC Alpha Series case.
Judge Silva referenced this case law in her opinion on the motion to dismiss.
Caesars Staffers Accuse Russell of Needs Cash
The two Caesars staffers who filed the lawsuit allege that the investment manager manipulated the retirement plan's offerings to funnel more capital into its struggling funds. If the case goes to trial, this could work against Russell.
Caesars' 401(k) plan was established in 1990 when the company was known as Harrah's. The decision to switch to RITC for management occurred in 2017, under the leadership of the "old Caesars". The current version of the casino giant emerged from Eldorado Resorts' $17.3 billion acquisition of Caesars in 2020.
Before the switch to RITC, it's estimated that the Caesars 401(k) had 39,000 participants with approximately $1.4 billion in total assets. These figures reportedly grew to 42,000 and $1.6 billion, respectively, by the end of 2019.
The plaintiffs believe the switch has resulted in a $100 million loss in investment gains for workers. Judge Silva notes that both the plan's participants and Russell may have made errors throughout this process.
"Such losses allegedly resulted from: (1) the Caesars defendants' decision to switch to RITC for managing the Plan's assets, (2) RITC's decision to move the Plan's assets from investment funds run by non-parties into RITC's own proprietary funds, (3) RITC's proprietary funds underperforming relative to the other investment funds, and (4) the Caesars defendants' inaction by failing to remove RITC when the Plan underperformed," she wrote in her opinion.
Target-Date Funds Could be the Culprits
When RITC took over management of the Caesars 401(k) in August 2017, it replaced prior target-date fund options with comparable alternatives from its own stable. Target-date funds are a mix of stocks and bonds with an expiration date designed to match a participant's desired retirement date. As the retirement date approaches, the fund's allocation to equities decreases while its exposure to fixed income assets increases.
Although not mentioned in the legal opinion, it's possible that target-date funds held by older Caesars employees suffered losses in 2022 due to stocks and bonds falling in tandem as the Federal Reserve raised interest rates seven times.
The plaintiffs claim that the target-date funds offered by State Street Global Advisors (SSGA) previously offered in Caesars' retirement plan significantly outperformed the Russell investments.
RITC is a subsidiary of FTSE Russell, one of the world's largest index providers.
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