SAN FRANCISCO -- A lawsuit settled this month raises the question of whether a plan sponsor has to pay 401(k) participants for their losses when the plan has a single investment option -- company stock.
U.S. District Court Judge Samuel Conti on Jan. 7 approved a $36 million settlement of a class-action lawsuit brought by participants in the Carter Hawley Hale Stores Inc. Profit Sharing Plan against the bankrupt department store chain for losses to the 401(k)/profit-sharing plan.
According to the 1997 lawsuit, the plan lost about $112 million because company executives -- between 1989 and 1991 -- had invested all employee contributions and company matching funds in company stock at a time when the business was faltering. The suit contends the executives continued to buy company stock for the plan until the day before it filed bankruptcy in 1991.
Under the settlement agreement Broadway Stores, which was part of Carter Hawley Hale and now owned by Federated Department Stores Inc., paid $22.5 million, and Bank of America, which acted as trustee of the Carter Hawley plan, deposited $13.5 million, into an escrow account to settle the case. That money, plus $1.5 million in interest, will be released to the administrator of the $1.2 billion Federated Department Stores Inc. Profit Sharing 401(k) Investment Plan, said William Corman, partner in the San Francisco law firm Bogatin, Corman & Gold, one of the attorneys for the plaintiffs.
Proceeds from the lawsuit will be deposited into the Federated plan for class members who are now employed by Federated and participating in its plan, Mr. Corman said.
Carter Hawley Hale had been one of the largest U.S. department store chains, operating the Emporium chain in Northern California, the Broadway chain in Los Angeles, Weinstocks in central California and Thalhimers in four southern states. The company also owned Neiman-Marcus, Dallas, until 1987 when Harcourt General Inc. increased its investment in the former Carter Hawley Hale store chain and gained a controlling interest in The Neiman Marcus Group, which it later spun off from Carter Hawley Hale.
In addition to the profit-sharing plan, Carter Hawley Hale had a stock plan called the Neiman-Marcus Stock Fund, Mr. Corman explained. In 1989, company executives launched a campaign to persuade employees, including high-level managers, to move their money from the allegedly low-risk Neiman-Marcus fund to the Carter Hawley Hale plan, Mr. Corman said.
The board waited until the day before filing bankruptcy in February 1991 before suspending further stock purchases for the profit-sharing plan, the lawsuit alleged. Plaintiffs argued the officers had a conflict of interests between their fiduciary obligation to the plan and their interests in maintaining the company's stock price, he said.
"Some novel issues were raised here," Mr. Corman said. "There was no case law on the point of how to apply the prudent investor rule to a plan that has one investment option."
Attorneys for Federated could not be reached for comment by deadline.