Merrill Lynch class action alleges company pays retirement account holders unreasonably low interest rates

Merrill Lynch class action lawsuit overview:

• Who: Plaintiff Margaret McCrary filed a class action lawsuit against Merrill Lynch.
• Why: Merrill Lynch allegedly pays retirement account holders unreasonably low interest rates in violation of the Federal Reserve’s interest rate requirements.
• Where: The Merrill Lynch class action lawsuit was filed in New York federal court.

Merrill Lynch pays retirement account holders unreasonably low interest rates in volation of the Federal Reserve’s interest rate requirements, according to a class action lawsuit filed Dec. 11 in New York federal court.

Plaintiff Margaret McCrary says she opened a Traditional IRA at Merrill Edge through a transfer from a 401(k) account in 2020. 

When opening the Merrill Lynch retirement account, she says she was required to agree online to a client relationship agreement that describes Merrill Lynch’s “sweep program” with Bank of America, which reportedly states that the “interest paid on retirement account assets will be at no less than a reasonable rate.”

However, the plaintiff says, Merrill Lynch breached the terms of this agreement by failing to pay investors a reasonable rate of interest on Merrill Lynch retirement accounts.

“Rather, as market interest rates rose beginning in March 2022 and into 2023, Merrill paid tier 1 and 2 retirement account investors (those investors with less than $1 million of assets under management) … only 0.01% APY (annual percentage yield) on their cash,” the Merrill Lynch class action lawsuit alleges.

The plaintiff says this percentage is equivalent to just $1 in interest per $10,000 in cash per year. During the same period, the plaintiff says, comparable brokerages paid substantially higher rates on swept cash.

For example, she says, R.W. Baird paid retirement investors between 2.07% and 4.15% on swept cash, depending on cash balances

Merrill Lynch class action says sweep program poses conflict of interest

The Merrill Lynch class action lawsuit describes a “sweep program” as a service in which a broker offers customers the option to automatically transfer credit balances into a money market mutual fund product or a bank account.

The Securities and Exchange Commission (SEC) has reportedly noted that cash sweep programs are a common source of conflicts of interest when the funds are deposited into affiliated entities. The plaintiff points out that Merrill Lynch acknowledged it has a conflict of interest related to the cash sweep program and depositing swept cash into affiliated banks.

Merrill Lynch failed to differentiate interest rates paid based on the reasonable rate provision of its client relationship agreement, but instead paid the same interest rates on retirement accounts and non-retirement sweep accounts, the Merrill Lynch class action lawsuit alleges.

The class action lawsuit claims Merrill Lynch “pursued a pricing strategy to maximize profits” and set sweep rates in a manner “inconsistent with the fair market value standard and are not presumptively reasonable rates.”

Last year, Merrill Lynch reached a $3.4 million settlement over allegations it violated the Fair Labor standards Act by misclassifying certain employees as exempt from overtime.

Do you have a Merrill Lynch retirement account? Tell us what you think of the class action lawsuit in the comments section.

McCrary is represented by Robert C. Finkel, Adam J. Blander, Philip M. Black, Antoinette Adesanya and Emer Burke of Wolf Popper LLP.

The Merrill Lynch retirement account class action lawsuit is Margaret McCrary v. Merrill Lynch Pierce Fenner & Smith Inc., Case No. 1:23-cv-10768, in the U.S. District Court for the Southern District of New York.

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