One participant’s investment losses don’t generate recoveries or legal fees sufficient to interest many plaintiffs’ lawyers in filing suit, so often, a class certification is sought in lawsuits challenging plan investments as a breach of fiduciary duty. One of the problems faced in trying to get a class certification is that 401(k) plan participants are invested in the challenged investment for differing time periods and will have had different investment experience.
After the U.S. Supreme Court limited class actions in its decision involving WAL-MART, pension professionals wondered how this would impact 401(k) litigation.
In Abbott v. Lockheed Martin Corporation, the Court of Appeals for the Seventh Circuit sent a message that 401(k) class actions can still be pursued when it overruled the district court and determined that participants could sue as a class to recover investment losses they claimed resulted from an imprudent plan investment option.
The Lockheed Martin 401(k) plans are among the largest in the United States. Lockheed Martin’s plans offered a stable value fund (SVP), which is intended to provide higher returns than money market funds with stability provided through principal and interest guarantees. Participants who invested in the Lockheed SVP sued Lockheed and its internal investment manager claiming the fund was an imprudent investment because it was too heavily weighted in money market funds and wasn’t designed to keep up with inflation. (Stable value funds are typically a mix of short-term and intermediate –term investments.)
In other words, the Lockheed plaintiffs didn’t argue that it was imprudent because it was risky, but rather that the selected fund was too conservative to produce a robust return.
Plaintiffs’ counsel defined the class as 56,000 participants invested in the SVP between September 11, 2000 and September 30, 2006 whose SVP units under-performed relative to a designated investment index. (Thus, anyone who might have benefited from investing in the SVP or didn’t actually invest in the SVP was excluded.) This class definition didn’t lock the plaintiffs into using that index to measure damages. Plaintiffs have claims of excessive fees that will also be pursued as a class as part of this case.. We await a decision on the merits.
The Lockheed Martin decision should be contrasted with a decision recently issued by a U.S. district court in Washington, which ruled that Weyerhaeuser Company defined benefit plan participants had no standing to recover damages as a result of plan losses from an aggressive investment program. The Weyerhaeuser court said the participants had suffered no individual harm, since in a defined benefit plan the plan sponsor must make up losses.
The participants, however, were permitted to pursue equitable relief relating to alleged fiduciary violations. This could potentially result in an order compelling a different investment policy, or even removing the current investment fiduciaries. The U.S. Supreme Court has also permitted surcharge of fiduciaries, which could involve restoring losses to the trust, in appropriate situations. Again, we await a decision on the merits.
The Lockheed and Weyerhaeuser decisions have implications far beyond the facts at issue.
Plans with underperforming investments and high fees face the risk of large litigation recoveries and court directives about investments. While plan sponsors have prevailed in most of the 401(k) suits that went to trial, they haven’t won all of them (see my blog post on the ABB case and there have been expensive settlements of some others. And even though the Weyerhaeuser decision didn’t authorize participants to seek monetary relief for losses, the equitable relief described above might restore losses to the trust.
Plan sponsors and other fiduciaries who want to reduce their exposure should consider that the cost of retaining professional advisers to assist them in fulfilling their fiduciary responsibilities well are relatively small in comparison to the recoveries or settlements that could result from failing to meet ERISA standards.