A self-directed investor on the Merrill Edge platform is suing Merrill Lynch for breach of contract, alleging that the firm did not pay “reasonable rates of return” on cash sweep accounts held by retirement clients.
The lawsuit, which is seeking class action certification, was brought by Margaret McCrary, a Michigan-based Merrill Edge client who opened an IRA through a transfer from a 401(k) workplace retirement plan in March 2020.
The lawsuit, brought by Wolf Popper LLP, seeks to represent retirement investors who have accounts at Merrill Edge, which had as many as 3.7 million investors overall in March, according to Barron’s.
McCrary alleges in her lawsuit that Merrill breached its client relationship agreement (CRA), including the firm’s commitment to pay a “reasonable rate of interest” on cash held in cash accounts swept to its affiliated bank, Bank of America.
Instead, as the Federal Reserve raised benchmark rates beginning in March 2022 and into 2023, Merrill paid investors with less than $1 million of assets under management only 0.01% APY interest on their cash, according to the lawsuit.
IRA investors with between $1 million and $10 million in AUM were paid a high of only 0.30% APY, while IRA investors with greater than $10 million in AUM were paid a high of only 1.06% beginning on November 7, 2022, McCrary alleged.
“During the time period, Merrill consistently paid the lowest rates on swept cash of brokerage firms surveyed by Crane Data and BofA Securities, regardless of whether brokerages swept cash to affiliated or unaffiliated banks,” according to the suit.
Swept cash had “a significantly higher rate” at Fidelity Investments, R.W. Baird, Robinhood, and Vanguard Investments, which did not sweep cash to affiliated banks, but rather swept cash to independent, unaffiliated banks, McCrary alleges.
For example, “Fidelity paid retirement investors starting in August 2023 as much as 2.72% APY on swept cash regardless of AUM, and R.W. Baird paid retirement investors as of September 8, 2023 2.07% to 4.15% on swept cash depending on cash balances,” according to the lawsuit.
The lawsuit is seeking damages and interest for all affected investors and an injunction against Merrill to bar it from “continuing to pay an unreasonable rate of interest on retirement sweep accounts.”
This isn’t the first time Merrill Lynch has faced this type of lawsuit from Wolf Popper. A similar suit brought by the law firm in 2019 was dismissed on the grounds that the firm attempted to compare Merrill rates to government money market funds. The suit was amended and has been refiled in federal district court in New York.
“This is the third complaint these lawyers have brought on the same issue over the last four years. We’ve successfully defended against these claims for the last four years and will continue to defend ourselves in these matters,” Bill Halldin, a Bank of America spokesman, told Financial Advisor magazine.