The US mutual fund industry is keeping close tabs on the progress of more than 20 lawsuits that allege companies such as Wal-Mart, Lockheed Martin and Boeing breached their fiduciary duties to employees by choosing funds with unreasonable fees for their retirement plans.
The plaintiffs generally claim their employers caused the retirement plans to pay too much for retail mutual funds and failed to take advantage of the large size of their plans to select institutional funds with much lower fees. At the heart of the cases is the Employee Retirement Income Security Act, the 1974 law that establishes minimum standards for managing pension plans.
The cases may be affecting the investment options that companies choose for their retirement plans, a big source of revenue for many fund groups. The lawsuits, many of which make additional claims of revenue-sharing or other conflicts of interest, may also be leading companies to push for lower fees and greater clarity regarding fee arrangements from the fund managers and service providers that run the retirement plans. Such plans are also known as 401 plans, drawing their name from a section of the Internal Revenue Code.
Most of the cases were filed in 2006 and are just now percolating to the top levels of the legal system. Plaintiffs in a lawsuit brought against farm equipment manufacturer Deere & Co petitioned the Supreme Court for review in November, following a federal appeals court’s dismissal of the case earlier in 2009.
Each year, American employees lose hundreds of millions of dollars due to imprudent selection of investment options with unnecessary fees. But in its February decision to dismiss the Deere case, the appeals court ruled that nothing in the law requires every fiduciary to scour the market to find and offer the cheapest possible fund.
While many of the cases don’t name as defendants the investments firms managing retirement plan assets, some do. The first of the 401 lawsuits to make it to trial claims the Swiss engineering group ABB Inc and two units of Fidelity Investments are fiduciaries of ABB’s employee retirement plans and therefore defendants. Fidelity is arguing that it is not a fiduciary to the plan, according to court documents.
The manufacturer of construction and mining equipment also agreed to no longer include retail funds as core investment options for a two-year period. The settlement would also require Caterpillar to put out requests for proposal if service contracts come up for renewal.
Companies are trying to protect themselves against these lawsuits by increasing disclosure of fees and potential conflicts of interest, as well as gaining greater clarity regarding retirement plan products and services. New lawsuits of this kind may not taper off, however. If more of the 401 excessive-fee cases are decided in plaintiffs’ favor, as with recent decisions involving Wal-Mart and Kraft Foods Global, then larger, more prominent law firms may start filing similar lawsuits against companies.
The department of Labor is expected to finalize guidance this year for plan sponsors on additional disclosure requirements to be made to 401 participants, which could stem future litigation.