Prudential Retirement Insurance and Annuity Co. and Cigna Corp. have agreed to pay $35 million to settle a class action in which Cigna workers claimed their 401(k) fees were too high and that the plan engaged in self-dealing at the expense of its workers.
The deal ends six years of litigation in the U.S. District Court for the Central District of Illinois. In 2007, a trio of Cigna 401(k) participants, Kim Nolte, Sherry Lewis and Theresa Mitchell, filed suit against the two companies.
The women claimed that the fees charged to the Cigna plan were “unreasonable and excessive,” and they alleged the company participated in self-dealing and prohibited transactions, thus violating their fiduciary duty to the participants. All individuals and beneficiaries with an account in the Cigna 401(k) plan between April 1, 1999 and May 31 are members of the settlement class.
Prudential spokesman Bob DeFillippo declined to comment, as did Joe Mondy, a spokesman for Cigna.
For now, the $35 million award is a preliminary settlement. The proposed settlement memorandum that's been filed with the court shows that defendants continue to deny the participants' claims.
The deal marks another win for Jerome Schlichter, senior partner at Schlichter Board & Denton LLP, who has tackled other plan sponsors in a number of 401(k) lawsuits, winning settlements for participants in plans at Caterpillar Inc., Bechtel Corp. and Kraft Foods Global Inc. He also is the plaintiff's attorney in the ongoing case against Ameriprise Financial Inc., filed by participants in the company's own 401(k).
These cases, along with fee disclosure regulations from the Labor Department, are going to push plan sponsors into action, industry observers said.
“It's going to force people to be duly diligent: If you're using proprietary funds, you better have a damn good reason for it,” said attorney Marcia Wagner of the Wagner Law Group, who specializes in the Employee Retirement Income Security Act of 1974. “You'd think that companies would fix that when they realized things aren't done that way anymore.”
“This is a window into how things were [at retirement plans in the past] and how they won't be again,” Ms. Wagner added. “People need to understand why the tort bar is so powerful.”
In their original complaint, the three women alleged that while workers had some 22 investment options to choose from — all of which were slugged Cigna “separate accounts” — the lion's share of funds, a total of 65% of plan assets, went into the firm's Fixed Income Fund and the Cigna Company Stock Fund. The fixed income fund was described to workers as a “group fixed annuity contract” that paid interest on amounts into the fund and guaranteed payments of the amounts deposited there, as well as accumulated interest.
Not only was the fixed income fund the plan's default investment option, but Cigna also required that half of the matching contributions it provided to workers be invested in the Cigna Stock Fund, according to the suit. It was only in 2005 that participants were permitted to transfer those matching contributions and their earnings out of the company's stock fund, the plaintiffs noted. Prior to that, they could only move the money if their employment with Cigna was terminated or if the participant hit age 55.
Cigna's Retirement Business, comprised of smaller subsidiaries and affiliates, acted as the investment manager, record keeper and service provider to the company's own retirement plan, the plaintiffs said. The company 401(k) plan held more than $2 billion in assets, and most of that money was overseen by Cigna's Retirement Business, according to the suit.
“This is a serious breach of fiduciary duty,” the plaintiffs wrote in the lawsuit. “It subjected the plan and its participants to the unreasonable and imprudent dangers of undiversified investing. In the 401(k) context, this lack of diversification is even more perilous.”
On top of that, Cigna allegedly reaped fees for the services it provided to its own plan: Since 1999, the company hasn't disclose its hard-dollar payments and allegedly made “hidden revenue-sharing transfers” to pay its service providers, according to the suit.
The participants also claim that Cigna reaped a large profit when it sold its Retirement Business to Prudential Retirement Insurance and Annuity Co. in 2004.
Under that deal, $18 billion in total assets under management — including more than $2.1 billion from Cigna's 401(k) — went to Prudential. Cigna scored an after-tax gain of $809 million from the sale of its retirement business, plaintiffs claimed.