Current Regulatory, Judicial and Legislative Environment

Fidelity Managed Income Portfolio Lawsuit Dismissed

In 2015, plan participants filed a lawsuit against Fidelity Management Trust Company expressing that Fidelity’s investment strategy for the Managed Income Portfolio was more conservative than other managed products in the marketplace. According to the lawsuit, the MIP had such low investment returns and high fees that it was an imprudent retirement plan investment. In June of 2017, the U.S. District Court for the District of Massachusetts ruled in Fidelity’s favor and dismissed the lawsuit. Based on a summary judgement, the judge ruled that the plaintiffs do not present enough factual evidence and that Fidelity did not put its interests ahead of the managed income portfolio and their participants. The judge concluded the case by stating that Fidelity continually revaluated the benchmark through a detailed analytical process and the fact that Fidelity chose a conservative benchmark was reasonable.

Self-Dealing Lawsuit Filed Against MFS

A participant in the MFS 401(k) Plan has filed a lawsuit contending that Massachusetts Financial Services Company (MFS) and their retirement committee breached fiduciary duties by filling the plan with proprietary investments and failing to remove poorly performing investments in a timely fashion. Based on the lawsuit, the defendants loaded the plan primarily with MFS investments and did not consider whether plan participants would be better assisted by investments managed by unrelated companies. The lawsuit concluded by accusing MFS and their retirement committee of failing to select the least expensive share classes and failing to monitor recordkeeping expenses. In 2012, the plan’s total assets were $515 million and the expenses were nearly 90% higher than the median total costs for retirement plans with assets between $500 million and $1 billion.

Voya Wins Advice Service Agreement Case

A lawsuit claiming that Voya Financial engaged in a violation of ERISA through a service arrangement with Financial Engines and the Nestle 401(k) Savings Plan was dismissed by a federal judge in June of 2017. Participants alleged that Voya provided no material services in connection with the advice program and the only reason for structuring the advice service as being provided by Voya with sub advisory services by Financial Engines was to allow Voya to collect a fee. Judge Lorna Schofield dismissed the breach of fiduciary duty because the complaint fails to allege facts showing the defendants were ERISA fiduciaries with respect to their fees. She noted in her decision that when a service provider has no relationship to an ERISA plan in negotiating a contract with that plan, the service provider is not an ERISA fiduciary. Schofield concluded that Financial Engines is not an ERISA fiduciary to the Nestle 401(k) Plan.

Northrop Grumman Settles ERISA Suit

Employees of Northrop Grumman have reached an agreement with their employer to resolve claims in a class action lawsuit initially filed in 2006. The lawsuit claimed that Northrop fiduciaries violated their duties to employees in two 401(k) plans by improperly causing those plans to pay Northrop for administrative services. In June of 2017, both parties reached a $16.75 million settlement figure to be used to improve the administration of the retirement plans. This settlement does not cover claims raised in a recent lawsuit brought up in September of 2016. Marshall v. Northrop Grumman Corp, the second lawsuit, posted similar allegations on behalf of Northrop employees and retirees regarding improperly causing their 401(k) plans to pay for administrative services.

American Airlines Settles on 401(k) Excessive Fee Case

Employees of American Airlines filed a lawsuit claiming that the investments in their 401(k) plan were more expensive and underperformed compared to similar alternatives in the marketplace. The plan participants accused American Airlines of not acting in a fiduciary capacity by keeping American Beacon funds in their 401(k) plan. Their allegations showed that they would have made significantly more in investment returns between 2010 and 2015 had there been more appropriate investment options. In July of 2017, American Airlines has agreed upon the $22 million settlement lawsuit with the employees. The settlement amount will make up 62% of America Beacon’s approximate revenue associated with the investments between 2010 and 2015. Though this aspect of the case was settled, earlier allegations were rejected by the U.S. District Court that American Airlines failed its fiduciary obligations by offering mutual funds as opposed to collective investment trusts or separate account options.

ERISA Plan Involved In Ponzi Scheme

In July of 2017, the founder of Midwest Green Resources was found guilty of fraud and theft from an employee benefit plan. An Ohio business owner of Midwest Green Resources arranged a Ponzi scheme that invested about $1.9 million of plan assets from 2010-2011 to Midwest Green Resources. The owner followed by allocating these plan assets for his and his wife’s personal use and to pay previous investors which included investments from plan participants. Over the last five years, the couple and others organized this scheme in which approximately 480 investors lost close to $20 million. In total, Midwest Green Resources received about $70 million in investments throughout this scheme. The business owner of Midwest Green Resources has been ordered to pay more than $32 million in reimbursement and is facing a jail sentencing.