NEW YORK (AFX) - Several major U.S. companies face a challenge over 401(k) fees from lawsuits that allege they allowed employees to be overcharged in retirement plans.
The suits could open the door to more legal action over 401(k) fees depending on their outcome, according to David Wray, president of the Profit Sharing/401(k) Council of America, a not-for-profit association of companies that sponsor plans.
Lockheed Martin Corp., General Dynamics Corp., United Technologies Corp., Bechtel Group, Caterpillar Inc., Exelon Corp. and International Paper Co. are named in the complaints, which were filed by Schlichter Bogard & Denton, a law firm in St. Louis.
The suits contend that 401(k) fees and expenses paid by the plans -- and borne by employees -- are too high, and that the companies didn't disclose them properly.
'This is important,' said Wray. 'The question is whether the plan sponsors can convince the court that these lawsuits are so meritless that they shouldn't go forward.'
At issue are rules under the Employee Retirement Income Security Act of 1974, a federal law that sets standards for private pension plans. ERISA requires that pension fees be reasonable and fully disclosed, and that they be charged solely for the benefit of the people in them.
In the Lockheed Martin suit, the argument is that pricing and fee structures developed by third-party plan administrators, record-keepers, consultants, investment managers and other vendors in the 401(k) industry are at best 'complicated and confusing when disclosed to plan participants.'
'At worst, they are excessive, undisclosed and illegal,' according to the lawsuit, which argues that Lockheed Martin violated its fiduciary duties under ERISA.
Many in the pension industry have anticipated lawsuits like these, said Rick Meigs, president of 401khelpcenter.com, which provides information on 401(k) plans. Why they emerged at this juncture isn't clear, but Jerome J. Schlichter, an attorney in the firm representing the companies, said the growing popularity of 401(k) plans may have something to do with it.
In traditional defined-benefit plans, employers have the burden of making up a shortfall when there is poor investment performance or high expenses, said Schlichter.
'As we know, traditional defined-benefit plans are rapidly disappearing,' said Schlichter. 'In contrast, in a defined-contribution plan, all the risk of not only investment performance but excessive fees are borne by the employee or retiree who is depending on that plan for his or her life savings.'
Big employers generally do a good job monitoring 401(k) fees, while some of the most egregious fee offenders are small companies, according to Dallas Salisbury, president and CEO of the Employee Benefit Research Institute, a retirement research group in Washington, D.C.
'It's interesting that they're going after very large companies that spend a lot of time and resources making sure that their plans are in compliance with the law,' said Salisbury.
Indeed, Lynn Dudley, vice president of retirement policy at the American Benefits Council, a Washington, D.C.-based trade group that represents employers on benefits issues, said most plan sponsors provide the necessary information to participants.
'I think most companies feel extremely confident that they've been following protocol,' said Dudley, who predicted the cost of litigation could discourage companies in the future from even offering 401(k) plans to their employees.
Caterpillar and Northrop Grumman declined to comment, citing policy. Exelon, which is one of the largest electric utilities, said its fees are reasonably and adequately disclosed. UTC said its 401(k) savings plan is well-managed, that fees are 'extremely competitive and reasonable,' and that the lawsuit is devoid of merit. 'We intend to vigorously defend ourselves,' UTC spokesman John M. Moran said in a statement. Lockheed Martin also said the suit against it is without merit and that it intends to defend against it vigorously.
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