Compliance November 6, 2017

Second Lawsuit Filed Against GE for Self-Dealing in 401(k)

The lawsuit accuses General Electric 401(k) plan fiduciaries of violating ERISA by offering and failing to monitor funds in the plan that were managed by the company’s investment management arm.

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Another participant in the General Electric Company (GE) 401(k) Savings Plan has filed a lawsuit alleging self-dealing by the company in offering investments managed by GE’s investment management arm, General Electric Asset Management (GEAM). 

The complaint says 401(k) plan fiduciaries violated the Employee Retirement Income Security Act’s (ERISA)’s fiduciary laws and ERISA’s prohibited transactions regulations by offering and failing to follow five investment fund options offered by the plan—GE Institutional International Equity Fund; GE Institutional Strategic Investment Fund; GE RSP US Equity Fund; GE RSP US Income Fund; and GE Institutional Small Cap Equity Fund. 

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The plaintiff says these funds were among the 15 investment options (other than target-date funds) offered in the plan during the class period, and all were managed by GEAM. The complaint further says the GEAM funds are the only non-index funds offered to plan participants, so if a participant wants to invest in actively managed funds, he/she is forced by GE and the plan trustees to invest in GEAM funds.

As actively managed funds, there were investment advisers and/or portfolio managers to be paid by plan participants from their plan savings, the complaint notes. “The mere act of limiting actively managed equity funds to GEAM Funds indicates that Defendants put GEAM interests before the interests of the Plan or Plan Participants,” it says. “GE has profited handsomely from these arrangements, earning tens of millions of dollars in fees during the Class Period and enhancing GEAM’s sale value.”

The lawsuit alleges that the defendants caused the investment decisions made by plan and “parties-in-interest” to engage in prohibited transactions during the class period. “Each time the Plans invested Participant assets or allowed parties-in-interest to be paid fees and costs from Plan assets to GEAM in connection with the Plans’ investment in a GE-affiliated investment option, these Defendants caused the Plans to engage in a prohibited transaction under ERISA. Each time the Plans paid fees to a GE-affiliated investment manager, the Plan engaged in transactions prohibited by ERISA Section 406(b), which prohibits Defendants from causing the Plans to engage in a transaction benefiting a party-in- interest person,” the complaint says.

The plaintiff also alleges that the defendants GE and GEAM failed to monitor the trustees and other fiduciaries of the plan to ensure that all fiduciaries were acting in accordance with ERISA fiduciary duties of prudence and loyalty and avoiding engaging in prohibited transactions. In addition, he alleges a co-fiduciary liability under ERISA 405(a) against all defendants who had knowledge of other fiduciaries’ breach of duties and/or role in prohibited transactions.

The lawsuit seeks disgorgement of unlawful fees, expenses, and profits taken by the defendants, and to obtain such further equitable or remedial relief as may be appropriate to redress and to enforce the provisions of Title 1 of ERISA.

This lawsuit includes similar allegations to one filed against GE in September.

Compliance November 6, 2017

Northrop Grumman Excessive Fee Case Moves Forward

Noteworthy about the case is that a challenge to fees provided to the recordkeeper via an arrangement with Financial Engines is filed against the plan sponsor and not the recordkeeper as in other suits that have been dismissed.

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A federal judge has certified class action status for a lawsuit alleging that Northrop Grumman engaged in self-dealing and failed to secure reasonable service fees for its 401(k) plan.

According to the original complaint, the defendants “acted to benefit themselves and Northrop by paying plan assets to Northrop purportedly for administrative services Northrop provided to the plan, which were not necessary for administration of the plan or worth the amounts paid. Defendants also caused the plan to pay unreasonable recordkeeping fees to the plan’s recordkeeper and mismanaged the plan’s emerging markets equity fund.”

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The plaintiffs also accuse the plan and its administrative and investment committees of allowing its recordkeeper to receive fees from an agreement with Financial Engines to provide participants with investment advice. Other lawsuits have challenged fees paid to recordkeepers from arrangements with Financial Engines. However, unlike the Northrop Grumman complaint, these lawsuits were filed against the recordkeepers and not the plan sponsors. In two cases—a lawsuit against Xerox HR Solutions and a lawsuit against Voya Financial—a federal judge dismissed the claims, saying the plan sponsor was the fiduciary responsible for negotiating fees for plan providers.

In certifying the class, U.S. District Court Judge Andre Birotte Jr. of the U.S. District Court for the Central District of California found the plaintiffs have adequately established Article III standing through evidence that shows named plaintiffs were participants in the emerging markets fund and the Financial Engines account. In addition, the plaintiffs have proffered evidence that since September 9, 2010, there have been at least 100,000 active participants in the plan, and the defendants do not appear to dispute that the plaintiffs have satisfied the numerosity requirement for class certification.

As to the commonality requirement, the defendants assert that it is impossible to determine whether this claim is common among all members of the class because the plaintiffs do not allege the “tipping point” at which the fees paid for recordkeeping became unreasonable. However, seeing as recovery is sought for losses to the plan, the question of when the fees became unreasonable is a common question, Birotte decided. “There will be only one answer because the relevant consideration is the effect of defendants’ conduct on the plan as a whole,” he wrote in his order.

The defendants also suggest that commonality cannot be established because various defendants served as fiduciaries under the plan at different times, and the class members were not all participants in the plan at the same time or for the same duration. However, Birotte again found that differences in participation by the class members does not defeat the fact that the question of whether the defendants breached their fiduciary duties to the plan is common to all plan participants’ claims and will generate answers common to all of the putative class members.

As for the typicality requirement for class certification, Birotte said, “Given that the focus in ERISA fiduciary breach cases is on the defendants’ conduct, and that the first amended complaint specifically alleges plan-wide fiduciary breaches and prohibited transactions, the court finds the typicality requirement satisfied.”

The order notes that “the party seeking certification bears the burden of showing that . . . at least one requirement of Rule 23(b) ha[s] been met.” Given that the plaintiffs assert Employee Retirement Income Security Act (ERISA) Section 502(a)(2) and (3) claims on behalf of the plan and allege breaches of fiduciary duty by the defendants that will, if proved, affect every plan participant, Birtotte concluded that “prosecuting separate actions by or against individual class members would create a risk of . . . adjudications with respect to individual class members that . . . would be dispositive of the interests of the other members not parties to the individual adjudications or would substantially impair or impede their ability to protect their interests.”

While he found class certification proper, Birotte modified the class. “Because the future participants will receive the benefit of any injunctive relief awarded, the court excludes future participants from the class,” he wrote.

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