Compliance June 7, 2021

Northern Trust Challenged in Second ERISA Suit

The lawsuit alleges the company failed to regularly monitor plan investments or remove ones that became imprudent.

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The Northern Trust Co. and its employee benefit administrative committee are facing a lawsuit alleging they breached their fiduciary duties under the Employee Retirement Income Security Act (ERISA).

Filed in the U.S. District Court for the Northern District of Illinois, Eastern Division, the lawsuit alleges that Northern Trust breached its fiduciary duties by failing to prudently select and monitor investment options for its Northern Trust Company Thrift-Incentive Plan. Specifically, the complaint alleges that the defendants failed to regularly monitor plan investments and remove or replace ones that became imprudent.

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According to the complaint, which covers a class period of June 1, 2015, to the present, the plaintiffs argue that Northern Trust loaded the plan with poorly performing proprietary funds called the Northern Trust Focus Target Retirement Trusts and kept these funds on the plan’s investment menu throughout the class period, despite continued underperformance. The complaint claims that the Northern Trust Focus Funds have significantly underperformed their benchmark indexes and comparable target-date funds (TDFs) since their launch in 2010, performing worse than 70% to 90% of peer funds, but says the defendants continued to use the funds as the plan’s default investment option.

Based on an analysis of data compiled by Morningstar, the plaintiffs estimate that the plan has lost “tens of millions of dollars” in retirement savings since 2015, due to the retainment of Northern Trust Focus Funds.

The plaintiffs are seeking to make good to the plan all losses resulting from the alleged breach of fiduciary duty, and are asking the court to order defendants to disgorge any profits made through the alleged breach. They are also pursuing equitable relief and a plan reformation to include only prudent investments.

This is the second ERISA challenge brought against Northern Trust in less than a year, and both lawsuits claim the firm allowed imprudent investment options. In November, the financial services company was hit with a lawsuit that alleged Northern Trust Co. and its retirement plan committee had “failed to regularly monitor plan investments and remove ones that became imprudent.” The lawsuit claimed defendants “loaded the plan” with the poorly performing Northern Trust Focus Target Retirement Trusts and kept the funds on the plan’s investment menu despite continued underperformance.

Responding to a request for comment from PLANSPONSOR, Northern Trust states, “Northern Trust believes the Northern Focus Funds have been an appropriate vehicle for retirement savings and plans to defend itself from the lawsuit’s claims.”

Compliance June 7, 2021

Serco Reaches $1.2 Million Settlement in Excessive Fee Class Action Suit

The suit had charged the Navy defense contractor with selecting mutual funds with an average expense ratio of 0.81% when funds costing 0.41% were available.

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Navy defense contractor Serco Inc. has reached a $1.2 million settlement agreement in the excessive fee lawsuit that was filed against its 401(k) plan last year.

After nearly a year of discovery and motions following private mediation that began in November, the parties have agreed to what the class calls “fair and reasonable terms.” The settlement includes an injunction on the plaintiffs from filing additional lawsuits on the same grounds as the original case.

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The settlement funds will be dispersed through a qualified settlement fund, with restorative money being given to participants in the Serco 401(k) plan and paper checks valid for 180 days to those who have left the plan. It awaits court approval.

The settlement agreement notes that the class wants to settle. In it, the defense denies all allegations and all liability for the allegations and claims.

The original Employee Retirement Income Security Act (ERISA) lawsuit was filed in the U.S. District Court for the Eastern District of Virginia. The proposed class action complaint accused Serco of failing to provide its 401(k) plan participants with the most cost-effective mutual fund shares, among other issues. According to the complaint, the unnamed issuer of the mutual funds in the plan offered a lower-cost share class for at least 21 of the 30 funds in the lineup, and those funds consistently achieved higher returns.

“The plan, however, inexplicably failed to select these lower fee-charging and better-return producing share classes,” the complaint stated. “As well, the administrative fees charged to plan participants by the recordkeeper, also unnamed, were consistently greater than the fees of more than 90% of comparable 401(k) plans, when fees are calculated as cost per participant or when fees are calculated as a percent of total assets.”

The complaint went on to state these “investment options and unreasonable fees cannot be justified.

“Their presence confirms more than simply sloppy business practice; their presence is the result of a breach of the fiduciary duties owed by Serco Inc. to plan participants and beneficiaries,” the lawsuit continued. “Prudent fiduciaries of 401(k) plans continuously monitor administrative fees against applicable benchmarks and peer groups to identify unreasonable and unjustifiable fees.”

The lawsuit said that for plans with between $250 million and $500 million of assets, the mean expenses were 0.41% of assets under management (AUM), but the plan’s fees averaged 0.81%.

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