LONDON - November 4, 2020: Northern Trust logo and sign at the top of the 50 Bank Street Northern Trust building, Canary Wharf. Credit: Dave Cooil/Adobe Stock
With an uptick in 401(k) mismanagement lawsuits in the last year, one firm, Northern Trust, has agreed to pay $6.9 million to settle a class action lawsuit by employees challenging the use of the financial service firm’s in-house “underperforming” target-date funds for its 401(k) plan. Plan participants sued the firm and its fiduciaries for violating federal law by failing to monitor the plan investments, most notably the proprietary TDF funds.
The settlement agreement in Conlon et al v. The Northern Trust Co. et al., was filed on Monday in the U.S. District Court for the Northern District of Illinois, and is still pending court approval.
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About 14,000 people covered by $2.9 billion Northern Trust’s retirement plan who have invested in the company’s target date funds since June 2015 are expected to benefit under the deal. The settlement amount represents between 12% and 38% of the participants’ estimated damages in the case.
The lawsuit filed by six participants in the Northern Trust Co. Thrift-Incentive Plan alleged that the company’s plan committee failed to prudently select and monitor investment options, both for performance and fees.
Specifically, the plaintiffs called out the company’s decision to retain 11 Northern Trust Focus Funds, a target-date-fund suite from the firm’s asset management division, alleging that the funds underperformed relative to comparable TDFs for three years, while on the plan’s investment menu. Those funds were the only TDF option in the plan and they were the default option in the plan, according to the original complaint filed in 2021.
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In March 2022, Northern Trust filed a motion to dismiss, arguing that the plaintiffs failed to cite a reasonable claim that the committee breached its fiduciary duties. However, in August 2022, U.S. District Judge Charles Ronald Norgle denied Northern Trust’s motion to dismiss the case, ruling that the plaintiffs had made enough of a case that the plan committee had neither sought the best investment options nor negotiated enough for the lowest fees. “After being included in the Plan, the Focus Funds continued to underperform and generated unreasonable fees, so their retention shows that Defendants followed no prudent management process,” Judge Norgle wrote.
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Lynn Cavanaugh
Lynn Varacalli Cavanaugh is Senior Editor, Retirement at BenefitsPRO. Prior, she was editor-in-chief of the What's New in Benefits & Compensation newsletter. She has worked for major firms in the employee benefits space, Vanguard and Willis Towers Watson, as well as top media companies, including Condé Nast and American Media.
