The District Court found that the ERISA plan participants had adequately pleaded their allegations that the defendants engaged in the kind of self-dealing that ERISA forbids by:
- neglecting to seek independent advice; and
- failing to diversify plan investments beyond private target-date investment funds (TDFs) that LMIMCo managed in-house. These investments were chronic underperformers.
The lawsuit has cleared a very big hurdle – one that knocks many ERISA fiduciary breach claims out of court. Fezer can now move on toward trial or settlement.
Huge class of potential plaintiffs vs. giant defense contractor
Lockheed is the largest defense contractor in the world and has more than 120,000 U.S. employees. It sponsors several 401k plans for employees.
Together, the assets of the three plans at issue – the Salaried Savings Plan, the Performance Sharing Plan for Bargaining Employees, and the Capital Accumulation Plan – totaled $49.705 billion.
The plaintiffs are current participants, former participants and beneficiaries of these three plans, a group that could number more than 140,000 individuals. The money represents substantially all the employer-sponsored retirement savings for thousands of Lockheed workers.
All in all, this could be an important lawsuit – a big class of participants, a huge defense contractor and a lot of money. Not exactly Godzilla x Kong, but close.
DIY scheme backfires
Lockheed and its subsidiary steered participant contributions into in-house TDFs that generated fees for Lockheed. This scheme happened in three steps.
First, the defendants marketed the in-house TDFs to participants and beneficiaries in ways that suggested that the funds were the only investment employees needed for retirement. For example, a Morningstar summary sent to beneficiaries said the funds were “a one-step approach to saving for retirement.”
Second, defendants made the in-house TDFs the “default funds” for participants in the plans. Workers who did not make their own investment elections were deemed to have chosen the TDF fund.
Finally, Lockheed and LMIMCo eliminated the only other investment option in the plans, thus sweeping the remaining employees into the in-house option. Mission accomplished.
In the end, the in-house TDFs held an outsized share of the three plans’ assets, and LMIMCo collected management fees.
It reportedly didn’t work out well for the participants and beneficiaries. In their Complaint, the plaintiffs argued that LMIMCo’s management of the funds produced results that were worse than the returns produced over the same time for similar funds by T. Rowe Price, Vanguard and Fidelity. The scheme, they claim, was nothing more than a “leaching operation” designed to extract value from the participants’ retirement savings.
ERISA duties of prudence and loyalty
Under ERISA Section 404, fiduciaries include those who manage plan investments and those who are charged with monitoring the performance of investment managers. Fiduciaries must manage retirement plans with the care of a prudent expert and act solely in the financial interest of plan participants.
This is a standard that is subject to interpretation. But it is clear that fiduciaries are not ultimately responsible for the good or bad performance of investments. For many years, the review of fiduciaries’ actions has focused on their process for reaching decisions, including whether they sought independent expert advice.
The fact that LMIMCo was a Lockheed subsidiary should have raised some red flags, especially when coupled with the sub-par performance of the TDFs and the fact that this was the only option on the menu.
READ MORE ERISA VIOLATION LEGAL NEWS
In recent ERISA lawsuits, participants have faced the additional barrier of providing a clear benchmark – very similar plans and funds – against which prudence and loyalty can be measured. This is especially challenging with in-house and the more bespoke forms of investment and may have been the reason that one count of Fezer was dismissed.
Prohibitions against self-dealing
Other sections of ERISA explicitly bar the kind of self-dealing (termed “prohibited transactions”) in which Lockheed seems to have engaged. It appears that they essentially paid themselves to manage the investment of the participants’ retirement money. Briefly, a transaction is prohibited only if three things are true:
- a fiduciary causes a plan to engage in a transaction; and
- he or she knows or should know that the transaction constitutes a direct or indirect furnishing of goods, services, or facilities to the plan; and
- the transaction is between the plan and a related partu.
The prohibited transaction rules are much brighter line than the prudence and loyalty standards.
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