by Gwen Moritz
Posted 4/23/2012 12:00 am
Updated 1 year ago
New Department of Labor regulations requiring unprecedented transparency in 401(k) fees may open the floodgates, but litigation over mismanaged retirement funds is already big business.
(Click here for a related article on the new fee disclosure regulations.)
Last month, a federal court in Missouri approved the settlement of a class-action suit brought by employees of Wal-Mart Stores Inc. of Bentonville who objected to the fees that came out of their 401(k) accounts.
The settlement amount was $13.5 million, a fraction of the $60 million that the plaintiffs claimed Merrill Lynch's padded management fees and Wal-Mart's fiduciary neglect had cost the retirement plan.
Wal-Mart and Merrill Lynch fought the complaint, which was first filed in 2008, and succeeded in having it dismissed at the district court level. But a three-judge panel of the 8th U.S. Circuit Court of Appeals at St. Louis unanimously overturned the lower court's decision in November 2009, setting the stage for the negotiated settlement.
The new fee disclosure rules obviously weren't in effect for the plaintiffs in Braden v. Wal-Mart, but the case revealed that Wal-Mart employees were at more than just a typical disadvantage. As W. Scott Simon, a principal in Prudent Investment Advisors of Arcata, Calif., wrote in Morningstar Advisor in February, the contract between Wal-Mart and Merrill Lynch specifically forbade disclosure of fees to the plan participants who were paying them.
Simon wrote: "The Wal-Mart case is the poster child for the way in which a 401(k) plan should not be run: plan investment options bearing excessive and entirely unnecessary costs, undisclosed conflicts of interest, lack of meaningful disclosure of costs to plan participants (which was actually part of the agreement between plan fiduciaries), and, I'd argue, an apparent absence of any serious fiduciary mindset on the part of the plan sponsor fiduciary and the trustee fiduciary."
In an even more recent case out of Missouri, U.S. District Judge Nanette K. Laughrey on March 31 awarded damages of $35.2 million against ABB Inc., the U.S. subsidiary of the Swiss manufacturing giant.(ABB also owns Baldor Electric Co. of Fort Smith, but it wasn't involved in this case.)
In that case, Laughrey found that ABB failed to monitor record-keeping fees or to negotiate for rebates or other savings that might be available. Furthermore, ABB turned a blind eye to the costs even after an outside consultant warned that excess fees being paid by 401(k) plan participants were seemingly being used to subsidize bargain-priced services provided to the corporation itself by Fidelity Trust.