Home ListingAugust 13, 2013

Lockheed to Face Class Action on Alleged Mis-Managed Low-Risk 401(k) Fund

<em>Class action status has been granted in a bitterly contested case over an alleged poorly invested stable value fund.</em>

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(August 13, 2013) — A panel of judges in the Seventh Circuit of the US Court of Appeals has reversed an earlier decision denying class certification in a legal battle between an employer and members of its 401(k) plans.

The decision opens the door for further claimants to come forward and contest the issue at stake in court – namely whether Lockheed breached its fiduciary duty to the two 401(k) plans by investing a large proportion of its stable value fund in money markets, losing it money over the long term.

A typical stable value fund will invest in a mixture of short and intermediate-term securities, such as treasury securities, corporate bonds, and mortgage-backed securities, the court document seen by aiCIO noted.

The longer-duration holdings mean that stable value funds normally outperform money market funds, which invest exclusively in short-term securities.

The plaintiffs who brought the case to the district court originally alleged that by investing the stable value fund heavily in money market investments, Lockheed’s decision led to a low rate of return, such that the stable value fund did “not beat inflation by a sufficient margin to provide a meaningful retirement asset”.

As such, managing the investments in this way was “imprudent” and violated Lockheed’s fiduciary duty to manage the 401(k) plans with care, skill, prudence and diligence.

Stable value funds are a mainstay of many defined contribution plans and their assets are growing. Out of 12,000 401(k) plans tracked by San Diego research firm Brightscope, stable value funds or similar vehicles held $339 billion US in assets at the end of 2011, up from $317 billion in year-end 2009.

The plaintiff’s attorney in the Lockheed case Jerome Schlichter told Business News Network the ruling would strengthen claims on behalf of 56,000 investors who now would not have to sue individually.

“This decision means if imprudent management causes poor performance in the 401(k) plan, plan fiduciaries are on the hook for the full damages,” he continued, adding there were other parts of the case which were also on track to proceed as class actions, such as claims of excessive record-keeping fees.

The hearing has now been remanded for further proceedings. Lockheed’s press team had not responded to a request for comment at the time of going to press.