The 401(k) Lawsuits Continue

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About two months ago, PBS aired “The Retirement Gamble” which delved into the problems facing American workers who have had their defined benefit pension plans replaced with sub-par 401(k) plans. One of the primary problems of these 401(k) plans is the high costs that are sometimes hidden as “revenue-sharing” fees. However, this situation has recently been addressed in the disclosure requirements implemented by the Department of Labor. Unfortunately, this does not address the damage already done to participants in some plans. Enter attorney Jerome Schlichter, senior partner at Schlichter Bogard & Denton, LLP who has represented workers in a string of class-action lawsuits against companies that either sponsored or ran plans that were alleged to have overcharged plan participants or simply failed to act in their best interests. Among the companies sued are Caterpillar which settled for $16.5 million, Kraft which settled for $9.5 million, and Bechtel which settled for $18.5 million.

According to an article in InvestmentNews magazine, the most recent settlement announcement involves Cigna Corporation and Prudential Retirement Insurance and Annuity Co. who have agreed to pay $35 million to Cigna employees and retirees who alleged that their 401(k) fees were too high and that the plan engaged in self-dealing at the expense of its workers. Until 2004, Cigna ran its own 401(k) plan and essentially forced the plan participants to buy their proprietary annuities and funds which were more expensive than similar products offered by companies such as Vanguard. In 2004, Prudential purchased Cigna’s 401(k) business which included Cigna’s own plan. Prudential, unfortunately, kept the high cost plan options in place, so it became culpable as well. This suit is very similar to the one currently proceeding against Ameriprise Financial, Inc., which shunted its employees into its own proprietary Riversource funds and did not have the decency to offer them the least expensive share class. The irony of both lawsuits is that a financial services firm is being sued by its own employees for a breach of fiduciary duty!

This truly goes to the heart of the problems with 401(k) plans—that all too often they are not being run by people who have a fiduciary obligation to plan participants. If they were, in our opinion, we would see only low cost passively managed funds (not just one or two token index funds) on the menu without the hidden revenue-sharing fees. For more information about a low-cost 401(k) plan provided by an investment fiduciary, please contact IFA’s Retirement Plan Services at 888-643-3133 or obtain a retirement plan scorecard from