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More 401(k) Fee Cases Are in the Works

November 29, 2007
Related Topics: Retirement/Pensions, Miscellaneous Legal Issues, Featured Article
Fourteen months after the first round of 401(k) fee lawsuits was filed, five cases are awaiting trial and lawyers are laying groundwork for more suits alleging ERISA violations involving defined-contribution plans.

    The lawsuits put an intense spotlight on revenue-sharing practices of providers that receive money from investment managers. In the long run, they could place pressure on fees paid to managers and record keepers of 401(k) plans. The litigation has a huge potential effect on 401(k) plan executives: Lawyers say plan sponsors are vulnerable to litigation if they haven’t exercised adequate oversight of plan fees.

    Pension attorneys expect law firm Schlichter, Bogard & Denton to target service providers in its next wave of litigation. The St. Louis firm is the one that filed the first 13 lawsuits against 401(k) plan sponsors for allegedly paying excessive fees. Sources said Schlichter Bogard is preparing another 15 lawsuits against plan sponsors and providers, but Jerome Schlichter, the firm’s founding partner, refused to confirm or deny any upcoming lawsuits.

    "What happens next depends on the facts of each case. We have sued service providers in some cases, but each case is unique," Schlichter said.

    Rumors of another round of lawsuits come despite a significant setback in June, when a U.S. District Court judge in Madison, Wisconsin, dismissed a class-action lawsuit against Deere & Co. of Moline, Illinois, and Fidelity Investments, based in Boston. Fidelity is trustee and record keeper for Deere’s $2.5 billion 401(k) plan.

    Deere employees, who are represented by Schlichter, Bogard, alleged that the plan and Fidelity charged unreasonable fees to participants, but Judge John C. Shabaz ruled that Deere and Fidelity met their fiduciary obligations under the Employee Retirement Income Security Act.

    The class-action lawsuits allege that plan sponsors failed to meet their fiduciary responsibilities by ignoring payments that investment managers paid to record keepers and other service providers. The suits also charge that plan executives failed to disclose these fees to participants, as required by the Employee Retirement Income Security Act.

    "Going forward, it will not just be plan sponsors; lawsuits will be targeting more service providers," said Michael Roach, an attorney with Winston & Strawn in Chicago.

    Roach said some law firms will see an opportunity to broaden their pursuit of service providers, but it will be a tough case to prove. "In cases of plan sponsors, it’s obvious that they are fiduciaries. It’s not the same game with providers."Other law firms have recently filed suits or launched investigations into 401(k) plan fee violations.

    Seattle-based law firm Keller Rohrback began probing several plan sponsors for ERISA violations in September, according to its Web site,, but the firm has not yet filed any suits alleging fee-based violations. Several calls to Lynn Sarko and Derek Loeser, attorneys for Keller Rohrback, were not returned.

    According to its site, the law firm is scrutinizing the $800 million 401(k) plan of Fifth Third Bancorp of Cincinnati and the $895 million 401(k) plan sponsored by Regions Financial Corp. of Birmingham, Alabama. The firm also announced November 8 that it is looking into fee-related issues at the $9.5 billion 401(k) plan of Wal-Mart Stores Inc.
"In particular, the investigation focuses on the fees and expenses pertaining to those options," Keller’s Web site said.

    Keller Rohrback filed a class-action suit in April against ING Life Insurance & Annuity Co. of Hartford, Connecticut; New York State United Teachers, a teachers union; and a union trust. The suit alleges that ING paid kickbacks to the trust to favor ING products in the union’s $2.3 billion 403(b) plan. In 2006, ING paid $30 million and the union trust paid $100,000 to settle similar kickback allegations filed by the New York Attorney General’s Office.

    In addition, Washington-based law firm McTigue & Porter, on behalf of participants in General Motors Corp.’s $21.2 billion 401(k) plans, filed two suits last spring alleging excessive fee payments. GMIMCo was the sole defendant in one; GMIMCo and State Street were defendants in the second suit.

    McTigue also filed a case in May against RadioShack Corp. of Fort Worth, Texas, which has focused less on the disclosure of fees and more on whether funds with high fees are the best option for employees.

Little traction
   Plaintiffs’ attorneys have won few victories in their litigation to date. Besides the Deere ruling, John W. Darrah, a U.S. District Court judge in Chicago, in June stayed a class-action lawsuit by Exelon Corp. employees that alleged the company charged excessive fees to participants in its $3 billion 401(k) plan. Exelon, which is based in Chicago, asked for the delay pending resolution of an expected appeal in the Deere case. Schlichter is the law firm representing plaintiffs in the Exelon suit.

    But the news has not been all bad for plaintiffs. In August, U.S. District Judge Warren W. Eginton in Connecticut dismissed one claim in a 401(k) fee suit against United Technologies Corp. of Hartford, Connecticut, but allowed the rest of the case to proceed.

    Separately, federal court judges denied motions by Lockheed Martin Corp., Bechtel Corp. and Kraft Foods Inc. to dismiss fee-related cases brought against them. Representatives of the companies being sued wouldn’t comment on the specific allegations. All of the lawsuits were filed by Schlichter.

    Lawyers are not surprised by the decisions upholding fee structures. Christopher Rillo, an ERISA attorney for Groom Law Group in Washington, said plaintiffs have not gotten much traction and "most of the cases filed will go with the defense." Groom is co-counsel to Boeing Co., whose 401(k) is being sued by Schlichter.

    Michael Melbinger, partner and chairman of the employee benefits and executive compensation practice at Winston & Strawn, said, "If they get a favorable decision [in any of the cases], the floodgates will really open."

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