Who gains from 401(k) fee lawsuits?

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Lawsuits by workers who are fed up with paying excessive 401(k) fees are beginning to pay off — for some people, at least.

After seven years of legal wrangling, a lawsuit filed in 2006 by employees of International Paper against their employer was settled last week. The $30 million settlement will be distributed among some 70,000 workers and former employees who had account balances in the company’s 401(k) plans for salaried and hourly workers between Jan. 1, 1997 and May 31, 2008.

Employees of International Paper alleged “among other things, that the plans breached their duties under Employee Retirement Income Security Act of 1974, or ERISA, by causing the plans to pay excessive fees, failing to capture revenue for the benefit of the plans, and imprudently causing the plans to invest in two particular plan options,” according to court documents.

International Paper denied the claims all along. As part of the settlement, it will put administration of its plans out for bid.

Other recent big payouts included a settlement of $35 million in July by Cigna and an award of more than $50 million in March 2012 following a full trial against technology firm ABB and its plan provider.

Going after the big guns

Jerome Schlichter of the law firm Schlichter Bogard & Denton represented plaintiffs in these and other cases. In recent years he also won settlements from Caterpillar, General Dynamics, Bechtel, and Kraft Foods. He has filed more than a dozen claims of this nature over the past seven years against big companies, including Boeing and Lockheed Martin.

It’s ironic that employees of large companies are suing their employers, because large companies tend to offer the cheapest plans, according to an analysis Bankrate released last month on the breakdown of 401(k) plan costs using data from the “401k Averages Book.”

So why does Schlichter go after large plans? “Well, the value of the assets in a bigger plan is bigger, so if there is an allegation of a fiduciary breach, then the loss suffered by the plan as a consequence of the breach would be bigger, which would necessarily result in a bigger settlement,” says Steve Saxon of Groom Law Group. In other words, that’s where the money is.

In the $18.5 million Bechtel settlement of a 401(k) fee case, Schlichter was awarded 30 percent of the net settlement fund not to exceed $4,859,872 plus costs of more than $1.5 million, according to PlanSponsor.com. And each named plaintiff in the class-action suit received a $7,500 incentive award.

So in the International Paper settlement, is $30 million enough to make restitution? If Schlichter gets 30 percent, that’s a $9 million payday for him and his firm. If the balance were to get evenly distributed among 70,000 401(k) participants (which is not how it will be apportioned), each of the participants would get $300 in their account.

It’s not a big payday for plan participants, that’s for sure. In fact, it could be argued that the money would have been better spent improving the plan and adding staff to oversee it, for example. Would that have happened? That’s another question altogether.

Should employers, or sponsors of retirement plans, be worried?

“If a plan sponsor is not appropriately evaluating the fees paid by the plan, if they’re not regularly monitoring the performance of the assets of the plan, if they’re not renegotiating the terms of their agreements for the service providers to the plan, if they’re not doing that stuff, then eventually they’re going to end up in a bad place,” says Saxon. “There is always the possibility of a fiduciary breach if the plan sponsor is not paying attention. If you’re paying attention, my belief is that the allegation of excessive fees and the other things ought to go away.”

Bankrate’s story on what to do if you have a lousy 401(k) plan offers some alternative solutions for plan participants.

Do you see problems with the 401(k) plan at your company?


Follow me on Twitter: @BWhelehan.

Barbara Whelehan is a co-author of “Future Millionaires’ Guidebook,” an e-book by Bankrate editors and reporters. It is available at Amazon, Barnes & Noble, iBookstore and other e-book retailers.

Written by
Barbara Whelehan
Contributing writer
Barbara Whelehan is a contributing writer for Bankrate. Barbara writes about a range of subjects, including homebuying, real estate, retirement, taxes and banking.