DOL to review documents in 401(k) excessive fee suit

The Department of Labor will look for a possible ERISA violation after making an unprecedented petition to look at the case documents last summer

Nov 21, 2014 @ 6:27 pm

By Darla Mercado

The U.S. District Court for the Central District of California is allowing, in part, a motion for the Department of Labor to intervene in a 401(k) excessive fee lawsuit against defense contractor Northrop Grumman.

On Nov. 18, the court gave the OK to the plaintiffs in the case — participants in Northrop's 401(k) plan — and their attorney Jerry Schlichter of Schlichter Bogard and Denton to pass along critical case documents to the Department of Labor. The court's clearance for the document sharing is a response to the DOL's petition for the files back in July.

The agency's Employee Benefits Security Administration is conducting an investigation of the Northrop Grumman savings plan, according to the DOL's original motion to intervene from this summer. The point behind the motion was to determine if a violation of the Employee Retirement Income Security Act of 1974 has taken place or is about to take place.

(More: Supreme Court decision on 401(k) fee case could have domino effect)

“It's the first time the DOL has sought to come into one of these cases,” said Mr. Schlichter. “We believe the DOL [is] very concerned about these payments coming out of participants' assets to Northrop employees and outside parties.” He added that he believes DOL officials are also concerned.

Mr. Schlichter is barred from sharing details on what exactly the DOL seeks, but he noted that the agency's willingness to step in is another example of the greater scrutiny officials are placing on 401(k) fees.

“There is an outgrowth of attention coming from the focus on fees in these cases,” he said, “just as the Supreme Court is showing interest in this subject by taking [noted 401(k) fee suit] Tibble v. Edison.”

The Northrop case is one of many that Mr. Schlichter is pursuing on the behalf of plaintiffs in 401(k) plans with alleged excessive fees. This particular suit, Grabek et al v. Northrop Grumman, dates back to 2007 and was subsequently merged with a related case in 2010. The plaintiffs allege that the defense contractor's executives and investment committee breached their fiduciary duty by using funds with exorbitantly high expenses, among other infractions.

Notably, Northrop's 401(k) plan allegedly offered a fund comprised solely of company stock, which paid average annual investment management fees of $454,588 over a five-year period. Other funds had supposedly high prices, too: A small cap fund offered on the plan menu charged up to 81 basis points, when other similar funds with less than one half of the assets charged 52 basis points, according to the complaint.

Administrative expenses were also high, according to the complaint: Administrative fees ranged from 12 basis points to 14 basis points in 2004, but jumped as high as 113 basis points in 2005. Those fees were allegedly paid to Northrop employees, and they “were excessive when compared to the market,” according to the suit.

“We wouldn’t comment on pending litigation,” said Northrop Grumman spokesman Mark Root.

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