Seller beware: That’s the message a recent court ruling sends to the sponsors of 401(k) retirement plans that offer their employees mutual funds created and managed by the same firms administering the plans.
In mid-March, Judge Bruce Kauffman of the U.S. District Court for theEastern District of Pennsylvania approved a settlement between New York Life Insurance Co. and the employees of a big corporate plan sponsor. In a twist, the sponsor was New York Life itself, and the plaintiffs were its own workers and sales agents participating in the company 401(k) plan. New York Life had offered employees its own mutual funds, and the plaintiffs argued that they could have done better elsewhere.
New York Life settled the suit as the plan’s sponsor, agreeing to pay $14 million — $4.62 million to the plaintiffs’ lawyers, $6.57 million to the defined-contribution-plan participants and $2.81 million to the defined benefit plan and its participants — as well as to hire an outside consultant to advise on the investment offerings in its plan, in compliance with a provision in the settlement stating that the insurer should have had an independent fiduciary examining its investment options for 401(k) participants.
The fallout? Any plan sponsor offering the proprietary mutual funds of its plan’s administrator — and the ranks are only increasing — is vulnerable to class-action litigation. “Someone has to hold the plan sponsors’ feet to the fire,” says Brent Glading, founder and managing director of Montclair, New Jersey–based Glading Group, which advises plan sponsors. It’s up to sponsors to ensure that 401(k) participants get the best possible choice of funds, he points out.
Plan sponsors must also be aware of the funds into which employees’ money is flowing automatically. New Department of Labor rules encourage plan sponsors to automatically enroll employees in 401(k)s and invest their contributions in age-appropriate investment funds, says Geoffrey Bobroff of Rhode Island-based Bobroff Consulting, which advises mutual fund firms.
