The Employee Retirement Income Security Act of 1974, commonly known as ERISA is a hot topic on this blog. Our readers know that it sets the minimum standards for most public-sector employer-provided health and retirement plans, but news reports seldom mention ERISA. Recently though, an ERISA excessive fee case is catching headlines for its nearly $40 million settlement.
McKinsey & Co., Inc., has a retirement plan with 33,000 participants. The case has claims of prohibited transactions and breaches of fiduciary duty, and sought ERISA equitable restitution. The basis of these claims were that the retirement plan performed much worse than other lower-cost investment options, but the fund still charged between $20 to $36 million per year in management fees. Essentially, the claim was that MCI illegally profited from these excessive feeds that were part of their employees’ 401(k) plans.
The parties agreed to negotiate. In their negotiation, to settle all of the pending claims, MCI, along with providing meaningful prospective relief, agreed to pay $39.5 million to settle the class action lawsuit, but it still must be approved by the U.S. District Court for the Southern District of New York.
These settlement funds will not all go directly to a common fund to reimburse their employees’ 401(k) plans. Instead, the money will first pay for administrative costs, including attorney fees and costs. In addition, the class representative will receive an individual award. The money that is left over will go into that common fund.
The meaningful prospective relief is intended to ensure that the alleged actions do not occur again. This includes increased recordkeeping requirements for the 401(k) plans. In addition, MCI agreed to hire an independent investment consultant to review its investment options for three years.
What it means
This case is a prime example that, just because an employer provides employees with a 401(k) plan, this does not mean, necessarily, that the plan has the employees’ best interest in mind. But, this case also shows that, when this happens, the employees have recourse. Specifically, ERISA sets the minimum standards and provides that those that administer 401(k) plan are fiduciaries, and when they violate their duties, plan beneficiaries can sue those administrators, both locally in the Washington, D.C. area and throughout the U.S.