Plaintiffs win round vs. Lockheed in stable value fund case

BOSTON Mon Aug 12, 2013 7:59am EDT

BOSTON Aug 12 (Reuters) - A federal appeals court handed a procedural victory to plaintiffs who say their Lockheed Martin Corp retirement plans were badly run, a boost for the closely watched lawsuit against the large 401(k) sponsor.

A panel of judges in the Seventh Circuit last week reversed a lower court decision that denied class certification to workers and beneficiaries with investments in a so-called "stable value fund" that Lockheed offered.

Among other things, the lawsuit accused Lockheed of imprudent management, saying its stable value fund delivered sub par returns by holding money market funds rather than a better mix of short and intermediate-term investments.

The plaintiffs say the fund underperformed an index of other stable value funds - the Hueler FirstSource index - and did not keep pace with inflation.

Stable value funds aim to protect investors' capital while yielding predictable returns that are smaller than those of more aggressive funds. Many use bonds paired with insurance contracts.

Stable value funds are a mainstay of many defined-contribution plans and their assets are growing. Out of 12,000 401(k) plans tracked by Brightscope Inc, stable value funds or similar vehicles held $339 billion in assets at the end of 2011, up from $317 billion in year-end 2009, data by the San Diego research firm focused on retirement products showed.

A typical concern of financial advisers is whether a stable value fund is producing enough returns to justify the fees it charges to maintain a complex set of underlying investments. But the Lockheed case raises the opposite concern, in which the plaintiffs essentially charge the fund was slacking off.

The ruling will strengthen claims on behalf of 56,000 investors who now will not have sue individually, said plaintiff's attorney Jerome Schlichter.

"This decision means if imprudent management causes poor performance in the 401(k) plan, plan fiduciaries are on the hook for the full damages," Schlichter said in a telephone interview on Friday. Other parts of the case were already on track to proceed as class actions, he said, such as claims of excessive record-keeping fees.

With $19.8 billion in assets, Lockheed's 401(k) plan for salaried workers is the sixth largest 401(k), according Brightscope. It had 93,222 participants. (The largest 401(k) plan was run by International Business Machines Corp, and had $37.6 billion in assets and 106,569 participants). Plaintiffs in the lawsuit against Lockheed had investments in both the plan for salaried workers and one for hourly workers.

Lockheed spokesman Gordon Johndroe said the Maryland defense contractor is reviewing the decision and will evaluate its options.

"We will continue to defend against this lawsuit at all stages of the litigation," he said in an e-mailed statement.

Schlichter's St. Louis firm has pursued a series of cases scrutinizing the management of retirement savings plans as companies move away from traditional pensions. Often his cases focus on allegations that funds charged excessive fees to plan participants.

Many 401(k)s are run by outside asset managers, exposing mutual fund firms to the litigation. Last year, for instance, Schlichter won a ruling that Fidelity Investments of Boston and ABB Inc, a unit of Swiss manufacturer ABB Ltd, violated federal law by causing ABB workers and retirees to pay excessive fees in their 401(k) plan.

Representatives for ABB and Fidelity said they have appealed the ruling.

The case is Anthony Abbott, et al, v. Lockheed Martin Corp and Lockheed Martin Investment Management Co, United States Court of Appeals for the Seventh Circuit, No. 12-3736.