Individual Account Balance Plans – The Class Action Environment
“Individual Account Balance Plans” are retirement plans where every participant has their own account consisting of their contributions, if any, and any contributions made by the employer. The participant’s account at retirement or separation consists of these contributions, plus/minus the investment performance and minus any expenses paid by the plan.
The most common type of individual account balance plan is the 401(k), but Employee Stock Ownership Plans (ESOP) Money Purchase Plans and Profit Sharing Plans also are part of this general category.
Last year the U.S. Supreme Court let stand a decision in the 7th U.S. Circuit Court of Appeals that allowed a case against Lockheed Martin to proceed as a class action. At issue was whether an action for breach of fiduciary duty under ERISA may be maintained as a class action in a defined-contribution retirement plan. In this case, Abbott v. Lockheed, the court held that it could be, providing the class definition is specific enough.
In Abbott, the plaintiffs allege that their defined-contribution retirement plans were poorly run and accuse Lockheed of imprudent management and a breach of fiduciary duty. In particular, plaintiffs claim that Lockheed’s Stable Value Fund delivered poor returns, underperforming compared to an index of other Stable Value Funds and not keeping pace with inflation.
Stable Value Funds typically invest in a mix of short- and intermediate-term securities. They generally outperform money market funds, which invest exclusively in short-term securities. Plaintiffs in Abbott allege that Lockheed’s Stable Value Fund invested too heavily in short-term money market investments, resulting in a low rate of return. According to the plaintiffs, structuring the Fund this way amounted to imprudent management.
Plaintiffs sought to define the class as such: all participants whose accounts held units of the Stable Value Fund during a specified time period and whose units underperformed relative to a specified index. The court held that this definition was specific enough to merit certification as a class.
In a 2011 decision, the 7th Circuit Court confronted for the first time the same question as in Abbott and came to a different conclusion. In that case, Spano v. Boeing, the court held that the proposed classes were too broad to meet the requirements necessary for class certification. In short, the Spano class was defined to include such terms as “all persons” who “are or were” participants who “are or were” affected or those who “will become” beneficiaries in the future. The court called this class definition “breathtakingly broad” and refused to certify the class.
Abbott explained how the two seemingly disparate results are actually consistent with one another. It explained that, unlike in Abbott, the class in Spano was not limited to a single fund and, indeed, it was not even clear which fund was being challenged. Thus, in Spano, the court held that a too-broad class definition combined with vague claims would give rise to “intra-class conflict of the sort that defeats” the requirements for class certification. The class in Abbott was “considerably narrower,” and therefore could be distinguished from the class certification unsuccessfully sought in Spano.
As a result of this reasoning, the circuit court reversed the district court’s denial of class certification and remanded for further proceedings.
Mark Johnson, Ph.D., J.D., is a highly experienced ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances.
ERISA Benefits Consulting, Inc. by Mark Johnson provides benefit consulting and advisory services and does not engage in the practice of law.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.