In one suit workers filed against Wal-Mart and its $9.9 billion 401(k) plan, a federal judge in Missouri has granted the retailer’s motion to dismiss the case, which alleged, among other things, that Wal-Mart improperly selected investment options that exposed 401(k) participants to excessive and undisclosed fees.
And just days after that judge’s ruling, another federal judge in California dismissed several key arguments in a lawsuit that 401(k) participants filed against Bechtel Corp.—only weeks before that case was scheduled to go to trial. In this suit, which was filed in 2006 and makes similar arguments that the company’s 401(k) fees were unreasonable and improperly disclosed, the judge significantly limited the claims that the Bechtel workers may pursue, noting that many of their original allegations over fees and Bechtel’s decision-making were “unsubstantiated.”
There are still more than a dozen other excessive-fee suits against companies such as Deere & Co. and Lockheed Martin hanging in the balance. But the recent progress in the Wal-Mart and Bechtel suits could offer some much-needed clarity—and comfort—to large corporations that sponsor 401(k) plans, benefits attorneys note. Without much direction from the courts in some of these pending cases, which first started surfacing in 2006, any large company with a massive retirement plan could conceivably be vulnerable to such litigation, attorneys stated.
“There’s a reason that few, if any, of the companies targeted so far have backed down and opted to reach settlements,” noted Robert Rachal, senior counsel and ERISA litigator at law firm Proskauer Rose. “Many have believed that these are highly defensible arguments made with broad, unsubstantiated claims. And apparently, now the courts are starting to find that too.”
The details in the recent rulings in the Wal-Mart and Bechtel suits vary, but both cases offer a reassuring message to large corporate plan sponsors: In determining whether a corporation breached its fiduciary duties to 401(k) participants, the actual fees charged to workers are not nearly as important as the procedure a sponsor has in place supporting its decision to hire, and keep, any firm that provides 401(k) services to plan participants.
So, for instance, if plan sponsors offer actively managed mutual funds on their 401(k) platforms, sponsors are not acting negligently if these funds wind up underperforming—even if the funds are more costly to participants than passive investment options that could have generated better returns for a lower fee. As long as 401(k) sponsors can document that there was sound reasoning and process underlying its selection of the actively managed funds, then they are not breaching their fiduciary responsibilities.
“It basically says that plan sponsors don’t always have to be perfect,” said Gregory Ash, an ERISA attorney at law firm Spencer Fane Britt & Browne. “But, at all times, they do have to be prudent.”
In the summary-judgment ruling in the Bechtel case this month, U.S. District Court Judge Charles Breyer wrote that even while funds in the 401(k) plan may have underperformed, “this does not render [Bechtel] liable for the structuring of the plan,” despite the suit’s claim that the company violated its fiduciary duty by maintaining “imprudent” investment options.
“It’s easy to opine in retrospect that the plan’s managers should have made different decisions,” Breyer stated in a 23-page court document. “But such 20/20 hindsight musings are not sufficient to maintain a cause of action alleging a breach of fiduciary duty.”
The federal judge in the Wal-Mart case struck a similar chord and dismissed the case, in part because it lacked “any factual support” that Wal-Mart had acted imprudently in selecting the funds in its 401(k). The workers’ claims, Judge Gary Fenner stated in a 14-page dismissal, pointed out only that the company could have provided 401(k) participants with less costly mutual funds.
“[Wal-Mart] could have chosen funds with higher fees for any number of reasons, including potential for higher return, lower financial risk, more services offered or greater management flexibility,” Fenner noted in the court documents. “Plaintiff’s dissatisfaction with fees or earnings does nothing to establish a colorable claim that [Wal-Mart] did not properly investigate available options before making a decision.”
Wal-Mart spokesman Greg Rossiter said the company was “pleased with the judge’s decision,” but he declined to offer further comment on the details of the dismissal. Derek Loeser, an attorney at Keller Rohrback who is representing Jeremy Braden, the lead Wal-Mart worker in the suit, said in an e-mail that he planned to appeal the dismissal. He did not return calls seeking more information.
The Bechtel case, for now, still appears set to go to trial December 1. Even though the judge’s recent ruling dismissed some of its initial arguments, Jerome Schlichter, the attorney who is bringing the suit against Bechtel—as well as 401(k) fee suits filed against roughly a dozen other companies—said the case was “far from over. ... We believe that there are genuine factual issues in the case, and we are confident that our position will be upheld.”
Bechtel declined to comment for this story. In its court argument, the company said it should have been protected from claims made in the suit by a “safe harbor” defense under Section 404(c) of ERISA law. This section says that if participants are ultimately making the decisions on how their 401(k) assets are invested, then sponsors are not responsible for any losses—provided, of course, that participants have a broad range of options to choose from.
Fenner declined, for now, to rule that this section of ERISA should provide Bechtel with complete immunity from the claims in the suit, leaving a window open for the trial—the first of these 401(k) fee cases—to take place next month.