A new 401(k) lawsuit against a small retirement plan demonstrates the kind of trouble plan sponsors can find themselves in when they try to go it alone.
A Florida-based business and its owner were sued last Friday for actions taken in the company's $480,000 401(k) plan, which lost approximately 63% of its value within a few years due primarily to an imprudent investment in a so-called “patent troll,” plaintiffs claim.
The lawsuit,
McClain et al v. Poppell et al, alleges Samuel Poppell, owner of the Emerald Coast Eye Institute in Okaloosa County, Fla., breached his fiduciary duty under the Employee Retirement Income Security Act of 1974 for failing to act prudently and diversify plan investments.
Plaintiffs claim Mr. Poppell served as investment adviser, investment manager, trustee and custodian of the company 401(k) plan, and retained sole discretion over asset allocation of plan participants.
Mr. Poppell directed the bulk of plan assets into a single plan holding, VirnetX (VHC), and failed to remove the holding as it depreciated significantly, according to the lawsuit filed in the U.S. District Court for the Northern District of Florida.
Bloomberg BNA first
reported the new lawsuit.
'PATENT TROLL'
VirnetX is a “patent troll” whose primary business is acquiring patents and attempting to sue for alleged patent infringement, according to plaintiffs, who are former employees and plan participants. As such, they say the company's business model was “inherently speculative and prone to extreme volatility.”
The retirement plan had exposure to the security in excess of 50%, with the remaining holdings concentrated in cash equivalents, according to the proposed class-action suit. The security's share price fell 90% since June 2012, plaintiffs claim, contributing to a large dip in the 401(k) value, from around $1.3 million as of the end of 2012 to
$480,000 at the end of 2014.
“Defendants either intentionally concentrated the ECEI Plan's assets in investments they knew to be volatile and risky, or, at minimum, were negligent and not reasonably prudent in researching and understanding the risks of investments or even understanding or applying basic investment principles such as asset allocation and diversification,” the lawsuit said.
Further, plaintiffs claim they were terminated from employment as a retaliatory measure for “exercising their rights under ERISA” by challenging Mr. Poppell's management of the plan.
Mr. Poppell didn't respond to a request for comment by press time.
The lawsuit is a far cry from the litigation the defined-contribution market
has seen proliferate within the past year, many of which attack companies over high fees in their plans.
“This one certainly raises a lot of issues you don't normally see,” said Duane Thompson, senior policy analyst at fi360 Inc., a fiduciary consulting firm. “It was more performance, investment losses, and they didn't mention anything about the cost.”
The retirement plan at issue is also much smaller than the multibillion-dollar behemoths typically targeted in such litigation. A few lawsuits against small plans, one
with $9 million and another
with $25 million, have emerged this year, though.
The Emerald Coast complaint doesn't offer specific detail on one point: 401(k) plans are self-directed retirement plans, meaning unlike with pension plans, participants choose how they want their money invested. However, in this case, plaintiffs allege the company owner determined asset allocation on behalf of participants.
BrightScope Inc., a retirement plan ratings provider, also labels the plan as a 401(k) plan.
“There's a huge question there over the facts. Is the owner of the company going to come back and say, 'It was a defined-benefit plan'?” Mr. Thompson said.
Michael Bixby, associate attorney at Levin, Papantonio, Thomas, Mitchell, Rafferty, & Proctor, the law firm representing plaintiffs, said more information will come to light if the case makes it to the discovery stage of trial.
