ERISA Class Action Watch

An Iowa plaintiffs’ firm has filed suit in the S.D. Iowa against Principal Financial Group on behalf of participants in 401(k) plans to which Principal provided bundled services. The purported class action alleges that a Principal subsidiary advises participants in retirement plans serviced by Principal that they should rollover their retirement assets to a Principal IRA offering “J Shares” class mutual funds. The complaint alleges that these J Shares had high expenses (particularly “internal” expenses – presumably meaning trading and similar expenses), and that participants would have been better off leaving their money in their retirement plans.

Principal is an ERISA fiduciary to the plans it services, plaintiffs further allege, because it exercises effective control over each plan’s choice of investment options. As a fiduciary, Principal’s methods of selling J Shares constituted breach of fiduciary duty and prohibited self-dealing under ERISA.

Although the complaint is hazy in parts, this suit still represents an important development. Plaintiffs’ lawyers are clearly attempting to extend the present fee lawsuits—which have been mostly aimed at the 401(k) plans of very large companies—to smaller 401(k) plans and IRAs, which typically charge much higher fees than large plans. (For a different approach, see Ruppert v. Principal Life Ins. Co., which is a purported class action by a class of plans.)

The suit also illustrates the difficulties that ERISA can pose for bundled service providers. Employers, especially smaller employers, want turnkey solutions for their retirement plans. But a service provider that attempts to take on too much responsibility risks becoming an ERISA fiduciary subject to extraordinary standards of conduct. Trying to meet the needs of employers while staying outside of the grasp of ERISA can be like walking a tight rope for these bundled service providers.

That said, successfully pursuing these claims will be an uphill battle for plaintiffs. In particular, all the claims hinge on proving that Principal was an ERISA fiduciary for these plans. This will be a highly factual inquiry, and it is difficult to see how Principal’s fiduciary status could be determined other than on a case-by-case basis. That would appear to preclude class certification.

• Young et al. v. Principal Financial Group complaint
• AP story on lawsuit