Suits Claim Excessive 401(k) Fees at 7 Firms

L.A. Times, Business News
by Kathy M. Kristof, Times Staff Writer

Seven of the nation's largest companies violated pension laws by allowing their employees to be overcharged by the outside firms running their 401(k) retirement plans, according to a series of civil lawsuits.

The employees were charged millions of dollars in excessive management fees, which often were hidden in obscure agreements and not disclosed to the workers, the suits allege.

"At best, these fee structures are complicated and confusing when disclosed to plan participants," claim all the suits, which were filed this month by attorney Jerome Schlichter in federal district courts in Illinois, California, Connecticut and Missouri. "At worst, they are excessive, undisclosed and illegal."

The companies named Lockheed Martin Corp., General Dynamics Corp., United Technologies Corp., Bechtel Group, Caterpillar Inc., Exelon Corp. and International Paper Co. together have more than 400,000 employees in 401(k) plans, according to the suits.

Spokesmen for Bechtel, Lockheed Martin and United Technologies defended their plans.

"United Technologies Corp. provides a highly cost-effective and successful 401(k) plan," company spokesman John Moran said. "We believe the lawsuit is meritless."

General Dynamics and Exelon declined to comment. Representatives of International Paper and Caterpillar didn't return calls.

The suits seek class-action status.

Schlichter, a St. Louis attorney at Schlichter Bogard & Denton, said his research determined that the companies cared little about what their workers had to pay in fees. In 401(k)s and other so-called defined contribution retirement plans, he noted, employers don't guarantee future payments to workers as they do under traditional, or defined-benefit, plans.

"In a defined benefit plan where you get a flat amount per month, no matter what the employer has reason to pay close attention to costs and expenses because the employer has to make it up if there's a shortfall," he said. "But, in a defined contribution plan, the risk of return and the cost of the fees and expenses are all on the employee."

In its Retirement at Risk series last spring, The Times reported that hidden fees were quietly eroding the 401(k) nest eggs held by 44 million American workers, and that many companies pay little attention to the costs.

Employee benefits experts say suits targeting 401(k) costs are rare but could become more common as companies increasingly scale back their traditional pension plans making earnings from 401(k)s more crucial.

"It is an area that requires a lot more attention," said Bruce Ashton, partner at Los Angeles benefits law firm Reish Luftman Reicher & Cohen, who is not involved in the litigation.

Schlichter said he sued the seven companies based on complaints from employees of those firms, and after his own investigation determined that the workers had strong cases.

In 401(k) plans, employees contribute a portion of their earnings to an investment fund, often with a matching contribution from their employer. The employee is typically given the option of investing in a variety of mutual funds, which charge fees to invest and manage the money.

The lawsuits focus on so-called revenue sharing deals, in which the mutual funds chosen for corporate 401(k) plans return a percentage of the management and investment fees they earn to the outside administrators who run the plans and determine which funds will be offered.

These revenue sharing arrangements were not disclosed to participants, the suits allege, and the costs charged for them have far exceeded what is reasonable to manage the accounts.

Schlichter said employers were required under the federal Employee Retirement Income Security Act of 1974 to prevent their workers from being charged "unreasonable and excessive" expenses for their retirement plans.

"Unlike generalized market fluctuations, employers can control these fees and expenses," the suits said. "Federal law requires them to do so."

Six of the suits also take aim at "master trusts," which are used when large companies sponsor more than one 401(k) plan such as when companies have separate plans for salaried and hourly workers.

Generally, master trusts are designed to save the plan money by consolidating the management of assets. The suits, however, allege that master trusts can also be used to obscure how much workers are paying.

The plans run by International Paper, for example, paid $1.2 million to outside administrators in 2004, the suit said. But that did not include the fees paid to outside administrators from the master trusts. Just one of International Paper's 11 master trusts paid an additional $3.6 million in fees, according to the suit, which did not disclose what the others paid.

"When hard dollar payments for plan services are disbursed from a master trust much less 11 separate master trusts it becomes difficult and sometimes impossible for plan participants to discern the amount of hard dollar payments the plan is making to service providers," the suit said.

International Paper has more than 60,000 participants in its 401(k) plans.

The Department of Labor, which regulates 401(k) plans, is working on new rules aimed at making fees charged to 401(k) plans more transparent, spokeswoman Gloria Della said, but she could not say when changes might be implemented.

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