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Class Action: Costly Retirement-Plan Litigation

In the absence of guidance from ERISA, these class-action lawsuits have changed the way defined contribution plans are designed.

In the absence of guidance from ERISA, these class-action lawsuits have changed the way defined contribution plans are designed. The lawsuits have also served as templates for many other suits that have followed. But not every company is paying attention.

Despite the many actions taken over participants’ outsize company-­stock holdings, some U.S. corporations continue to allow their employees to invest more than 10 percent of their retirement plans in company shares.

AOL Time Warner

In both the ERISA lawsuit and a related securities class-action suit, plaintiffs alleged that fraudulent accounting practices during the largest corporate merger in history resulted in AOL TW’s overstatement of revenue by at least $1.7 billion, inflating the value of AOL TW stock and causing billions of dollars in damage to investors. The case was settled in 2006.

WHO: 38,584 participants

CLASS SETTLEMENT: $100 million

ATTORNEY FEES: 17.9 percent of settlement plus expenses

Beverly Enterprises

One of the first class-action cases involving alleged excessive 401(k) plan fees and expenses, as well as revenue sharing between plan service providers and mutual funds in which the service providers are indirectly compensated by plan participants based on the value of plan assets rather than the actual value of the services rendered. Settled in 2010.

WHO: 10,000 participants

PLAN CHANGES: Fiduciary education

CLASS SETTLEMENT: $6.25 million

ATTORNEY FEES: Up to one third of settlement

Electronic Data Systems

This was the first case in which a U.S. circuit court of appeals reversed class certification (in 2007) in an ERISA 401(k) “stock drop” class action. It became a template for defendants resisting both stock drop and fee-disclosure litigation. Nonetheless, EDS agreed to a monetary settlement and made plan changes.

WHO: More than 61,000 participants

CLASS SETTLEMENT: $12.5 million

PLAN CHANGES: Employer contributions made in cash for three years; continuation of match for three years; right to diversify company stock; company stock fund eliminated after three years.

ATTORNEY FEES: $4.1 million plus expenses

Enron Corp.

Three separate lawsuits filed in 2002 related to the plunge in company stock following the 2001 discovery of accounting fraud. The company allowed employees to hold large amounts of Enron shares in their 401(k) plans through the company match as well as their own selection. Settled at the end of 2005. Along with the WorldCom lawsuit, it created a guide for stock drop cases.

WHO: More than 20,000 participants

PLAN CHANGES: None; Enron folded.

CLASS SETTLEMENTS: Total in three lawsuits: $220.2 million

ATTORNEY FEES: $53 million

General Electric Co.

One of the largest classes in the history of ERISA litigation. A stock drop case in which plan participants had between 60 and 70 percent of their retirement plan assets in GE shares. Settled in 2009.

WHO: 318,000 participants

PLAN CHANGES: Fiduciary training; investment education and online tools; the right to direct allocation of match; additional investment options, including Roth 401(k).

CLASS SETTLEMENT: $49.5 million

ATTORNEY FEES: $10 million

General Motors Corp.

In the midst of ongoing troubles with the company’s defined benefit plan and financial condition, the United Auto Workers sued GM fiduciaries for allowing too much company stock in the defined contribution plan. Settled in 2008.

WHO: 180,000 participants

PLAN CHANGES: Independent fiduciary for company stock; right to diversify; upgraded participant communications; financial modeling tool for one year; financial advice at $30 for one year.

CLASS SETTLEMENT: $37.5 million

ATTORNEY FEES: $11.25 million

IBM Corp.

The largest lawsuit aimed at the conversion of a traditional legacy defined benefit plan to a cash balance plan. This 2005 settlement caused many other companies to phase out their cash balance plans for fear of similar repercussions.

WHO: More than 270,000 participants

PLAN CHANGES: Cash balance plan terminated.

CLASS SETTLEMENT: Additional pension benefits ($314.3 million guaranteed, plus additional amounts if upheld by appeals court)

ATTORNEY FEES: 29 percent of the first $250 million; 25 percent of $250 million to $750 million; 21 percent of $750 million to $1.25 billion; 17 percent above $1.25 billion

IKON Office Solutions

The first securities litigation to be certified as an ERISA class-action lawsuit, in 1998; settled in 2002.

WHO: 51,000 participants

PLAN CHANGES: Right to direct investment of match; independent communications and investment advisers for two years.


ATTORNEY FEES: $6.4 million in fees and expenses

Lucent Technologies

The 401(k) plan participants received company stock through their employer match; when the shares plummeted, their retirement plans were decimated. Settled in 2003.

WHO: 136,000 participants

PLAN CHANGES: Amend plan to permit diversification of match and increase maximum contribution; provide educational materials on diversification.


ATTORNEY FEES: $10.35 million

Source: Fiduciary Counselors

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