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Philips North America agrees to pay $17 million, make 401(k) reforms to settle fiduciary breach case

One day after participants in its 401(k) plan alleged fiduciary breach violations in a lawsuit, Philips North America LLC agreed to a preliminary settlement of the class-action case and agreed to pay $17 million.

The preliminary agreement, which must be approved by a U.S. District Court judge, was reached May 11 in the case of Ramsey et al. vs. Philips North America LLC in its role as fiduciary to the Philips North America 401(k) plan, Andover, Mass. The plan had $3.6 billion in assets as of Dec. 31, 2016, according to the latest Form 5500 filing.

The company "admits no wrongdoing or liability with respect to any of the allegations or claims," according to the settlement document submitted to U.S. District Court in East St. Louis, Ill.

The participants alleged that plan fiduciaries allowed the payment of "unreasonable investment management and administrative fees," according to a joint motion to the court seeking preliminary approval of the settlement. The document said plan fiduciaries violated their ERISA duties by keeping a money market fund — the Vanguard Prime Money Market Fund — as the sole capital appreciation choice instead of looking at a stable value fund. The document also said that plaintiffs argued that the plan retained a real asset fund — the Principal Diversified Real Asset Fund — "that had insufficient performance" and that "consistently underperformed prior to inclusion in the plan."

According to the settlement document, the firm of Schlichter Bogard & Denton began discussions in early 2016 with lawyers for Philips, outlining a potential complaint. In September 2017, the parties held an all-day private mediation session. Although they agreed on a monetary settlement in November 2017, it took several months to agree on non-monetary issues, leading to the settlement last week.

"It's necessary to have a case on file because the court has to approve any settlement," Jerome Schlichter, managing partner, Schlichter Bogard & Denton, wrote in an email describing the legal timeline.

"We're pleased that the employees and retirees of Philips will be compensated and will have an improved plan due to the reforms to it in this settlement, which will enable them to more effectively build their retirement assets," he added. His firm could receive $5.67 million of the total settlement.

Among the non-monetary terms, Philips will:

  • Hire a consultant to review the 401(k) plan investment lineup to recommend if the plan should keep the money market fund or add a stable value "or comparable fund."
  • Issue an RFP within 18 months of the settlement for a record keeper. Under the terms of the RFP, the fee for basic record keeping shall not be based on a percentage of plan assets. It may keep Vanguard Group as the record keeper after the RFP process is completed.
  • Consider offering collective investment trusts "to the extent such investments are permissible and are otherwise identical to a particular mutual fund," and consider offering the lowest-cost share class available for any mutual fund considered for inclusion in the plan."

Representatives of Philips could not be reached for comment.