Wave of Putative Class Actions Filed Against Sponsors of 401(k) Plans

September 28, 2006

A wave of putative class action lawsuits were filed last week against sponsors of 401(k) plans and other defined contribution retirement plans. The lawsuits were filed in federal courts throughout the country against some of the largest and best known companies in the U.S. The lawsuits, alleging violations of the Employee Retirement Income Security Act of 1974 ("ERISA"), target the fee structures found in some plans that offer mutual fund investments as well as plans that permit participants to invest in a fund comprised solely of the sponsor’s stock. Several observers have predicted that additional similar lawsuits will be filed in the future against other companies and their 401(k) plans or other defined contribution retirement plans. 

While each lawsuit is founded on the specific terms of the plans in question, they all have several common characteristics: 

  • First, the named defendants are the corporate plan sponsors, the administrative committees for each plan, and, in some instances, the individual members of the board of directors for the corporate sponsor. 

  • Second, each lawsuit asserts that the compensation paid to investment managers and other service providers is excessive, thereby violating the prohibited transaction rules of ERISA. The complaints allege that, in addition to “hard dollar” forms of compensation, many of the investment managers and/or administrative service providers are compensated by undisclosed revenue sharing for having steered plan investments to a particular investment vehicle. These allegations echo complaints made by investors and others in the past few years against brokerages and mutual funds for not disclosing certain fees and compensation paid to the broker for making the fund available to investors. 

  • Third, several of the plans in question are ERISA § 404(c) plans that permit participants to select the investment fund in which their account balances will be invested. The class action suits allege that the failure to disclose the true compensation arrangement for service providers constitutes a violation of the disclosure rules under ERISA. 

  • Finally, some of the lawsuits challenge the fees charged participants in connection with funds in which the participant can invest in the sponsor’s stock. 

If you are a sponsor of a defined contribution plan and are sued in one of these actions, have been threatened with such an action, or if you would like someone to review your 401(k) or other defined contribution plan, please feel free to contact the Gibson Dunn lawyer with whom you work or: 

William Kilberg – Washington, DC (202-955-8573, [email protected]
Paul Blankenstein – Washington, DC (202-955-8693, [email protected]
Eugene Scalia – Washington, DC (202-955-8206, [email protected]
David West – Los Angeles (213-229-7654, [email protected]), 
Karl Nelson – Dallas (214-698-3203, [email protected]
David Schiller – Dallas (214) 698-3205, [email protected]
Joel Feuer – Los Angeles (310-551-8808, [email protected]
Stephen Fackler – Palo Alto (650-849-5385, [email protected]), or 
Joseph Busch – Orange County (949-451-3898, [email protected]).

© 2006 Gibson, Dunn & Crutcher LLP

The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.