General Electric recently agreed to pay $61 million to settle claims that its underperforming retirement plan cost its employees millions of dollars. The settlement document was filed on Oct. 6 with a U.S. District Court in Boston.
The plaintiff class includes employees who invested in at least one of five challenged mutual funds from Sept. 26, 2011, through Aug. 3, 2023.
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Largest Settlement in Retirement Plan Case
The plaintiffs in the 2017 class action in federal court moved for a judge’s approval of the settlement, saying it was the largest settlement ever in a lawsuit alleging mismanagement of an in-house retirement plan. The deal must be approved by a federal judge.
The lawsuit alleged that five retirement funds managed by GE Asset Management (GEAM) were the only actively managed options available to retirement plan participants. Since at least 2011, the funds underperformed relative to comparable investment options, leading hundreds of thousands of plan participants to lose an estimated $283 million, the lawsuit claimed.
The plaintiffs accused GE of breach of fiduciary duty and engaging in prohibited transactions in violation of the federal Employee Retirement Income Security Act of 1974 (ERISA). GE has denied wrongdoing. The company has said that federal law expressly permits employers to offer in-house mutual funds in their retirement plans.
(Reuters)
Alleged ERISA Violations
The plaintiff class includes about 250,000 GE employees. They claimed that GE refused to consider adding comparable, better-performing funds, removing any of the GE funds or replacing the managers. They said GE breached its ERISA duties of loyalty and prudence to monitor and remove the funds from the plan.
At the time, GE was considering potential buyers for GEAM, which was ultimately sold to State Street Advisors for $485 million in 2016. The participants claimed GE kept the underperforming funds to keep GEAM’s assets under management elevated and to collect fees, inflate the sale price of GEAM and use the proceeds to pay down debt GE owed to its underfunded defined benefit pension plan.
Huge Fund
An agreement in principle for the class-action settlement was announced in early August, but no terms were revealed at that time in a settlement achieved through mediation.
The GE Retirement Savings Plan had assets worth $30.4 billion as of Dec. 31, 2021. GE’s plan is one of the biggest 401(k)s in the country.
In the past few years, settlements of 401(k) lawsuits have generally increased, ranging from as low as about $200,000 to as much as $40 million, reflecting 75 cases between 2020 and 2022.
(Pensions and Investments and Investment News)
Best Practices for Employers
Companies settling ERISA lawsuits are typically accused of failing to pay adequate attention to the retirement plan, such as by failing to remove or replace poor or overly expensive investment choices and allowing vendors to charge above-market fees.
To avoid these lawsuits, employers should form an active retirement plan oversight committee, provide fiduciary training for committee members, adopt an investment policy statement, minimize investment fund expenses, compare investment performance and drop underperforming funds.
Upholding Fiduciary Duties
HR managers and members of committees that select vendors for retirement plans and choose investment fund options are plan fiduciaries legally bound to make decisions in plan participants’ best interests. Fiduciaries who fail to make decisions in participants’ best interests can be subject to civil and criminal penalties and fines. Liability insurance provides a measure of protection for fiduciaries and plan sponsors, but in cases of extreme wrongdoing, the financial and reputational risk to employers remains substantial.
Fiduciaries should ask vendors to explain their fees and services, scrutinize vendor contracts, and benchmark retirement plan fees.