The 401k Class Action Lawsuit Gaining Traction with Courts

401k class action lawsuitEmployees in the Starwood Hotels plan with 40,000 participants filed a class action lawsuit in California while lawsuits against Fidelity and Putnam were granted class action status in federal court in Massachusetts.

The case against Starwood, which includes the Westin and Sheraton hotel brands, alleges that 401k participants paid $25 million in excessive fees even though the participants were offered index funds, similar to the allegations against Chevron which were subsequently dismissed and then refiled. In addition, the lawsuit claims that participants were damaged because no stable value fund was offered forcing those interested in preserving capital into low interest money market funds, similar as well to the Chevron case.

Even though Starwood was able to negotiate lower fees after the US Supreme Court’s Tibble ruling, which held that plan sponsors have an ongoing duty to monitor plan investments, the plaintiffs claim that the actions should have been taken earlier.

A Massachusetts court granted class action status in a case filed on behalf of 222,000 Barnes & Noble 401k participants who claim that returns in the Fidelity stable funds offered in in their plan were too low after a change in 2008 to appease insurance providers backing the fund. The Putnam case, which was also granted class action status brought by their employees, alleges that the 401k was loaded with inappropriate proprietary funds.

A couple of lessons for plan sponsors in these cases. The 401k class action lawsuit is a business which will not continue unless lawyers see the opportunity to make money. It’s also a copycat industry. The trend towards class action status, easier under the new DOL rule which limits service provider’s ability to prohibit them in their agreements, means that attorneys can group many plaintiffs together increasing the potential payout.

The other lesson we are learning is that revenue sharing is fraught with danger. Even index funds, like with the Starwood case, can be loaded with additional fees to offset the cost of running a plan. Revenue sharing makes it more difficult for plan sponsors to understand exactly who is being paid what making it nearly impossible to determine if the fees are reasonable as required by ERISA plan fiduciaries. Time to look at your plan and whether your investments include revenue sharing before a law firm does?

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