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401(k) Fee Litigation Proceeds: More Suits, More Attorneys, New Targets

After firing off an initial volley of 14 class action lawsuits against Fortune 100 employers and their retirement plans, the St. Louis-based Schlicter, Bogard & Denton law firm now has plenty of company in the attack on 401(k) plan fee practices.  As the Schlicter cases proceed, new suits are being filed by other plaintiffs’ firms attacking revenue sharing, disclosures to participants, and allegedly excessive fees.  In many of the more recent suits, theories first espoused by Schlicter lawyers have been polished to counter defenses that have been raised in the initial set of lawsuits.

Status of Schlicter Cases

As we predicted when the first seven suits were filed in September 2006 (see “A Frontal Assault on 401(k) Fee Practices”), defendants have had no luck making these cases go away quickly.  With one notable exception, none of the 13 different judges overseeing the Schlicter cases has granted the defendants’ requests to have the claims dismissed or clarified.  The exception came in a four paragraph order in the Exelon case in which the judge struck the plaintiffs’ claim for investment losses arising out of the defendants’ alleged failure to comply with ERISA Section 404(c).  Even that ruling left the door open for the plaintiffs to reassert this theory of recovery in an amended complaint, so long as they clarified how the defendants’ failure to follow Section 404(c) caused their investment losses.  The plaintiffs apparently have decided not to re-plead that claim.

The courts rejected motions to dismiss or clarify the plaintiffs’ complaints in the Kraft and Boeing cases (see “District Court Declines to Dismiss Kraft 401(k) Fee Case”).  In both of those decisions the court also refused to dismiss the plaintiffs’ 404(c)-based claims.  Similar motions to dismiss or clarify are pending in at least nine of the other Schlicter cases.

The case against Deere & Company and Fidelity, which is pending in the Western District of Wisconsin, appears to be on a fast track.  Trial in that case has already been preliminarily scheduled for September of this year.  The result is that the Deere case could significantly affect the others, as this court will be the first to render key legal rulings on issues that are common among all of the complaints.

Interlopers Aplenty

As if managing 14 class action lawsuits were not enough, the Schlicter attorneys now find themselves fighting not only the legal teams of their Fortune 100 targets, but also a cadre of other plaintiffs’ attorneys seeking to horn in on the action.  In what amounts to a battle for lead class counsel status – and a priority claim to any attorneys’ fees awarded – a separate group of lawyers has filed almost identical claims against two of the Schlicter targets.  Joining in the challenges against Northrop Grumman and Kraft Foods is the New York-based Squitieri & Fearon firm, working in collaboration with the Keller, Fishback & Jackson firm in California and the Gainy and McKenna firm from New York.  Those firms have filed their own claims in Heidecker v. Northrop Grumman and Pino v. Kraft Foods.  The two cases against Northrop Grumman have already been consolidated (and are now known as In re Northrop Grumman Corporation ERISA Litigation).  Shortly after the Grumman cases were consolidated, however, Schlicter survived Keller Fishback’s motion to be appointed co-lead counsel.

In what may be a significant development in the plaintiffs’ favor, attorneys for the AARP were recently granted permission to intervene on behalf of the plaintiffs in the Northrop Grumman litigation.  It remains to be seen what role the AARP will play in that case, or whether it will ask to intervene in any of the other suits.

Excessive Fee Claims Abound

Aside from the Schlicter lawsuits, claims alleging ERISA violations as a result of excessive fees are finding their way into other cases.  Making good on its promise to “investigate” fee practices, the ERISA powerhouse Keller Rohrback law firm added excessive fee claims to its lawsuit against ING and the New York State Teachers Union in Montoya v. ING Life Insurance and Annuity Company, which was filed in New York on March 28.  That suit is based primarily on the groundwork laid during former New York Attorney General Eliot Spitzer’s state-law investigation of, and settlement with, these parties over an allegedly illegal scheme in which the Union received kickbacks from ING in exchange for endorsing ING’s 403(b) products.  In addition to arguing that ING and the Union breached ERISA-based duties of loyalty and prudence by engaging in the alleged endorsement scheme, the Montoya plaintiffs also contend that the administrative fees paid to ING were excessive, and that revenue sharing payments ING received amounted to plan assets that were improperly used.

Adding to the list of cases challenging fee practices, two lawsuits filed against General Motors in April tacked excessive fee claims onto run-of-the-mill prudence attacks on the use of so-called “single equity” stock funds in several GM and Delphi defined contribution plans.  In Brewer v. General Motors Investment Management Corp. and Young v. General Motors Investment Management Corp., the plaintiffs argue that plan fiduciaries imprudently offered participants the ability to invest in Fidelity mutual funds — which charge asset-based fees that are used, in part, to pay for recordkeeping and other administrative services — when the plans already received those services from, and were charged separately for them by, other providers.  The GM and ING cases join similar challenges to retirement plan fee practices asserted against Nationwide, Principal, and The Hartford.

Who’s Next?

Although it is certainly too early to rule out additional lawsuits against large employers and their 401(k) plans, or copy-cat suits against smaller employers and plans, it appears that sponsors of variable annuity investment products, which are typically offered under Code Section 403(b) arrangements, may be sitting in the hottest of the hot seats.  These products have been heavily criticized for their lack of transparency and high fees.  Critics also contend that annuity providers often engage in various forms of “pay to play” practices.  These include arrangements in which investment companies allegedly pay annuity providers what amounts to a kick-back (in the form of revenue sharing payments) to gain shelf space on the provider’s list of investment products that are made available to 403(b) plans, or in which the annuity provider pays 403(b) plan sponsors (such as teachers unions) to endorse the annuity provider among its members.

Keller Rohrback’s website identifies ten variable annuity providers the firm is investigating, including AIG, MetLife, Mutual of Omaha, and Prudential.  That firm also has targeted the National Education Association’s “Valuebuilder” 403(b) program.  This program is alleged to have engaged in the same kind of endorsement scheme as the one at issue in Keller’s lawsuit against ING and the New York State Teachers Union.  To the extent that these unions received payments to endorse the annuity providers, or significantly limited participants’ choices among providers, the 403(b) programs may be subject to ERISA’s fiduciary standards.

Plaintiffs’ attorneys also claim to be investigating other 401(k) investment and service provides, including Ameriprise Retirement Services, Automatic Data Processing, and Bisys.  It is conceivable that one or more of those entities will join Fidelity at the defense table.  Moreover, Keller Rohrback has targeted at least eight more plan sponsors for investigation.

We can expect to see more lawsuits taking on retirement plan fees in the coming months.  If you would like to keep up with those developments, please register to receive our periodic updates by sending us an email directly.

If you have questions about the matters addressed in this article, please contact:

Gregory L. Ash, Chair of Spencer Fane’s ERISA Litigation Groupgash@spencerfane.comPhone:  (913) 327-5115