McKinsey settles 401(k) suit for $39.5 million

McKinsey & Co. is shelling out $39.5 million to put a class-action lawsuit over its retirement plans behind it, according to court records filed this week.

The settlement applies to about 33,000 people who were participants in the company’s profit-sharing and money-purchase plans between Feb. 15, 2013 and the date the court would approve the settlement.

Participants in the plans sued the firm in early 2019, alleging that McKinsey violated the Employee Retirement Income Security Act by including in-house managed funds from McKinsey Investment Office on the plan menu. The McKinsey office received investment management fees of between $20 million to $36 million per year from those funds, which were more expensive and had weak performance relative to other available investment options, the plaintiffs alleged.

The company’s profit-sharing plan included nearly $5.2 billion in assets among more than 24,000 participants as of the end of 2018, according to data from the Department of Labor. The money-purchase plan represented more than $1 billion among nearly 18,000 participants.

Along with the monetary component of the settlement, McKinsey agreed to retain a third party to review the plan’s investment options and expense reimbursements, according to the proposed order for the settlement. The company will also issue a request for proposals for record-keeping services.

“We are pleased to have reached a settlement to resolve this matter, and we look forward to presenting the agreement to the court,” a McKinsey spokesperson said in an email. “As part of the settlement, we are admitting no wrongdoing of any kind.”

The case was filed in U.S. District Court in the Southern District of New York.

Plaintiffs in that case are represented by law firm Nichols Kaster. McKinsey is represented by Morgan Lewis.

ANOTHER SETTLEMENT

Huntington Bancshares last Friday agreed to a $10.5 million settlement in a class-action lawsuit over the company’s Investment and Tax Savings Plan.

Participants sued the company in 2017 in U.S. District Court in the Southern District of Ohio Eastern Division, alleging that Huntington Bancshares engaged in self-dealing, to the detriment of the plan, by including investment products from affiliates on the menu. In 2012, 16 of the 21 investment options within the plan were proprietary products.

“Defendants hitched the plan to Huntington’s products and services, even as Huntington wound down or sold associated operations and assets,” the complaint read. The company “used [its] control of the plan to position Huntington to profit from the demise of Huntington’s mutual fund business. Defendants’ disloyalty and imprudence has cost the Plan tens of millions of dollars since 2011.”

The company’s retirement plan had $839 million in assets among more than 13,500 participants as of the end of 2018, according to DOL data.

Huntington does not admit any wrongdoing in settling the case, according to the proposed order.

The plaintiffs are represented by Nichols Kaster. Huntington is represented in the case by Sidley Austin.

DEFENDANTS VICTORIOUS IN TWO CASES

American Airlines last Wednesday was granted summary judgment in a long-running class-action case involving its 401(k) plan.

It was a dramatic turnaround — the case was nearly settled in 2018, but the judge had deemed the proposed settlement of $8.8 million to be too low.

“In their efforts to persuade the court to approve the settlement, plaintiffs and their counsel so convinced the court of the merit of plaintiffs’ claims on behalf of the class that the court concluded, among its concerns relative to the terms of the proposed settlement, that the amount to be received by the settlement class was not sufficient,” the judge’s order for summary judgment read.

The case centers on a credit union fund used within the plan, which was the only low-risk, liquid and income-producing option on the menu, according to court records. The lawsuit was filed against the company, its retirement plan committee and its credit union.

“Defendants violated their fiduciary duties by having the AA Credit Union Fund as the only plan investment option that would qualify as an income-producing, low-risk, liquid fund,” the judge’s summary of the complaint read. “The AA Credit Union Fund produced extremely poor investment returns.”

Instead, the plan should have included a stable-value fund, the plaintiffs contended.

In July, the court denied class certification for the plaintiffs.

The plaintiffs didn’t provide convincing evidence that participants were harmed by the use of the credit union fund, rather than a higher-yielding stable-value fund, the judge wrote. The plaintiffs also failed to show that alleged procedural failings by American Airlines led to plan losses.

Further, “plaintiffs complain that the interest rate on the AA Credit Union Fund was ‘abysmally low.’ But making a bare allegation does not mean anything without a meaningful benchmark,” the order stated. “They rely on a comparison to stable value funds, even though their expert admits that the two investment options have different characteristics.”

The judge dismissed the case with prejudice, meaning that the plaintiffs cannot file an amended complaint. However, the plaintiffs have already filed an appeal in the 5th Circuit Court of Appeals in California, court records show.

GREAT-WEST LAWSUIT

In a separate case, defendant Great-West Capital Management won after an 11-day bench trial.

That class-action lawsuit involved three cases filed since early 2016 that had been consolidated. Plaintiffs in the three different retirement plans alleged that Great-West charged excessive investment management fees for the products on their plan menus.

After testimony from 13 witnesses, the judge found that the plaintiffs failed to meet the necessary burden of proof and could not show that there was any financial damage resulting from the alleged breaches of fiduciary duty.

Only one of the plaintiffs’ witnesses produced a calculation of damages, though that witness “was thoroughly discredited on cross examination” as he had not worked in the mutual fund industry for more than 10 years and his calculations appeared to have significant flaws, among other reasons, the judge wrote.

The court issued its opinion last Friday. The case was in U.S. District Court in Colorado.