401(k) plans with underperforming investments and high fees may be facing a higher risk of class-action litigation nowadays, thanks to a couple of court cases.
So warns Carol Buckmann, pensions and benefits counselor in the New York law offices of Osler, Hoskin & Harcourt.
"People were wondering what would happen to these lawsuits after the Wal-Mart decision," said Buckmann. "This is a significant step."
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In that decision, the U.S. Supreme Court had opted to limit class actions in 401(k) litigations. But in two more recent court decisions, involving Lockheed Martin Corp. and Weyerhaeuser Corp., the courts have given the go-ahead to class action suits claiming poor investment choices by fund managers.
Over the past few years, there have been at least 30 lawsuits against 401(k) plans alleging fees were too high. Most have been dismissed, while a half-dozen or so have been settled.
In Abbott v. Lockheed Martin, the 7th U.S. Circuit Court of Appeals last month reversed an earlier decision and allowed a class action to move forward against a 401(k) plan. The plaintiffs claim a conservative investment was too conservative and thus generated a return lower than should have been expected.
In the Weyerhaeuser case, Judge Robert Lasnik of the U.S. District Court for Western Washington ruled this summer that the suit filed in 2011 – which alleged that pension fund managers breached their fiduciary duty by investing in alternative financial vehicles, including hedge funds – could go on. In a victory for the defense, he also ruled that only actual damages could be recovered.
The lawyer representing employees in the Lockheed suit said these rulings send a clear message.
"It puts fiduciaries on notice that they have to take their obligations seriously," said Jerry Schlichter of Schlichter, Bogard & Denton in St. Louis. "And if they don't meet the fiduciary standards, which are very high standards, they are going to be held liable."
While Schlichter said he would ask the court to set the date for trial for as soon as possible, the outcome and long-term effects of the cases are anybody's guess.
Of course, lawsuits claiming malfeasance, like charging fees that are too high or being overly aggressive, are not new. Indeed, the Lockheed case has been wending its way through the courts since 2006.
Buckmann, for one, believes the Lockheed and Weyerhaeuser decisions have "implications far beyond the facts at issue."
"While plan sponsors have prevailed in most of the 401(k) suits that went to trial, they haven't won all of them … and there have been expensive settlements of some others," she wrote.
Schlichter has advice for participants to make sure their retirement funds are being well managed.
Employees need to ask questions," he said. "Watch what investments are being made and what fees are being charged. Be informed."
Simple as that.
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