Few employees can imagine that their humble 401(k) plans could become a virtual profit center for their own employers, but according to attorney Jerome Schlichter, that was exactly the case for some of corporate America's most notable names.
Mr. Schlichter landed a $35 million settlement last June in a class action against Prudential Retirement Insurance Annuity Co. and Cigna Corp. His firm spent six years representing a number of Cigna 401(k) participants who claimed the plan profited from self-dealing at the expense of its own workers.
While the Prudential/Cigna settlement is the largest, it is by no means the only case Mr. Schlichter has won against some of America's largest corporations. He has also negotiated multimillion-dollar settlements with Bechtel Corp., Caterpillar Inc., General Dynamics Co., International Paper Co., and Kraft Foods Global Inc.
In addition, Mr. Schlichter has six similar 401(k) suits pending. The defendants include Massachusetts Mutual Life Insurance Co. and Ameriprise Financial Inc.
The volley of suits has been enough to rattle not only employers but the financial services firms that serve them.
“[Mr. Schlichter] has been a disruptive force in the industry,” said Marcia Wagner, managing director at The Wagner Law Group.
The cases have caused employers and financial services firms to think twice about 401(k) fees and how they're disclosed, she said.
“Nobody is going to say that they [made changes in the way they do business] because of him, but has it happened? Of course it has,” Ms. Wagner said. “He filed a whole slew of cases against the bedrock of corporate America, and they all had that common denominator of excessive fees.”
It was employers' move from the defined-benefit pension model to a defined-contribution model — one that shifted risk from the employer to the worker — that brought 401(k) plans to the attention of Mr. Schlichter.
“My mother living on my father's pension as a widow could no more have picked stocks than she could have flown to Mars, it was so out of her league,” he said. “But she didn't have to worry about it [because] she still got the check.”
The 65-year-old attorney, founder of Schlichter Bogard and Denton, brought on board several lawyers with expertise in this corner of ERISA law and undertook a 21-month-long study of the 401(k) industry in the beginning of January 2005. He filed his first lawsuit in September of the next year.
Mr. Schlichter said his firm's research revealed scenarios in which workers were paying high retail fees for plan investments, recordkeeping costs went undisclosed and fiduciaries routinely failed to track plan fees.
Above all, revenue sharing, which is the additional compensation mutual fund families pay to record keepers and broker-dealers that work with the plan — what some call “kickbacks” — ran unchecked. Plan fiduciaries owe a duty to their workers to ensure that excessive fees aren't being charged through revenue-sharing agreements.
“It's the same [fiduciary] law as if your nephew's parents were killed in a car wreck, and you're acting as a trustee for the nephew: You must serve his interests,” said Mr. Schlichter. “You can't say, 'I'm going to have my buddy handle your money and steer kickbacks to me.'”
In addition to excessive fees, Mr. Schlichter has sued employers over investment options which favor the employer over the workers.
In the Prudential/Cigna case, for example, some $2.4 billion — close to 65% of the plan's assets — were invested in Cigna itself, according to the original complaint. That happened because the company's default investment option was a “group fixed annuity contract” that was sold by Cigna and because the company required that half of the matching contributions employees contributed to the plan had to be invested in the Cigna Company Stock Fund.
“By causing approximately 65% of the plan's assets to be invested in Cigna, defendants not only forced the plan and its participants to bear imprudent levels of risk, but also subjected them to the conflicts of interest inherent in having the plan's investment management, record-keeping and other services performed by Cigna's for-profit retirement business,” the plaintiffs alleged.
The plaintiffs in the pending cases against Massachusetts Mutual and Ameriprise Financial also claim they were placed in allegedly expensive proprietary investments that were supposedly profitable for the companies but less so for the worker.
Mr. Schlichter said that taking on a large employer was a tall order for some retirees and workers he has represented. “Even if the federal law says you are protected from retaliation, there are a lot of people who are still working and don't want to step forward because of that concern,” he said. “Others feel that it's their obligation to fellow employees and retirees to make a difference for the plan.”