CIGNA Latest Target of 401(k) Fee Suit

March 5, 2007 (PLANSPONSOR.com) - The St. Louis law firm that made national news by filing a batch of lawsuits over "excessive" retirement plan fees has now turned its legal sights to the CIGNA Corporation and its 401(k) plan.

Attorneys Daniel Conlisk and Heather Lea of the Schlichter, Bogard & Denton firm filed a 58-page fiduciary breach suit against CIGNA, plan administrator John Arko and the Corporation Benefit Plan Committee. The suit was filed on behalf of plaintiffs Kim Nolte, Sherry Lewis and Theresa Mitchell, employed by CIGNA HealthCare of Illinois in Bourbonnais, Illinois, under the Employee Retirement Income Security Act (ERISA).

The suit includes a request to be certified as a class action on behalf of other CIGNA 401(k) participants. The suit said attorneys aren’t sure of the number of people currently in the class but noted that there were 44,322 participants at the end of 2005 with 401(k) balances.

The litany of legal sins CIGNA and its officials were accused of committing, according to the lawsuit, included:

  • charging unreasonable fees and expenses to the plan that were not incurred solely for participants’ benefit;
  • entering into agreements with third parties that forced the plan to pay unreasonable fees and expenses;
  • failing to monitor the fees and expenses paid by the plan;
  • failing to understand the various methods by which vendors in the 401(k), financial and retirement industry collect payments and other revenues from 401(k) plans;
  • failing properly to disclose to participants the plan’s fees and expenses. 

The plaintiffs claimed the defendants have not informed plan participants of the actual dollar amount of investment management fees deducted from their 401(k) accounts. Instead, investment management fees are subtracted from plan participants’ accounts before the returns of participants’ investment option/funds are reported, so that the fees do not appear on participants’ statements, the suit charged.

Nonetheless, the plan has incurred “substantial” recordkeeping, administrative and other costs and defendants have charged such costs against plan participants accounts though hidden revenue sharing payments, the suit claimed.

The suit charges that the defendants are liable to the plan and the plaintiffs for losses suffered as a result of the alleged fiduciary breaches and should be charged for any transactions for which they cannot account or which were not proper uses of plan assets.

According to the suit, CIGNA participants may contribute up to 25% of their earnings in the $2 billion-plus plan and may choose among 22 investment options, all of which are organized as CIGNA separate accounts. The two largest options, the Fixed Income Fund and the CIGNA Company Stock Fund, have comprised approximately 65% of plan assets in recent years. The plan's default investment option is the Fixed Income Fund.

For most participants, CIGNA contributes a regular match of 50% of participants' contributions up to 6%. CIGNA requires that half of this matching contribution be invested in the plan's Cigna Stock Fund, the suit said.

According to the suit, before April 2004, the plan's default investment option, the Fixed Income Fund, was a "fixed group annuity contract with GLIC" and was 100% invested in the general account of CIGNA. At the end of 2003, the Fixed Income Fund contained over $1.1 billion while the next largest fund, the CIGNA Stock Fund, held $307 million, according to the suit.

By causing approximately of 65% of the plan's assets to be invested in CIGNA, defendants not only forced participants to bear "imprudent" levels of risk, but also subjected them to the conflicts of interest inherent in having the plan's investment management, recordkeeping and other services performed by CIGNA's for-profit retirement business, the lawsuit charged.

Sale to Prudential

On April 1, 2004, CIGNA sold its Retirement Business to Prudential Retirement Insurance and Annuity Company (PRIAC) (See  It's Official: Pru Buys CIGNA Retirement ). Through this sale, PRIAC became the plan's primary investment manager, recordkeeper and service provider. As part of this sale, CIGNA's Retirement Business transferred approximately $18 billion of assets under management to PRIAC, including the plan's assets of more than $2.1 billion, the suit said.

CIGNA reaped an after-tax gain of $809 million from this sale, as well as other financial benefits including the release or reduction of various contract or guarantee obligations, the suit alleged.

The defendants did not make sure that the plan was properly compensated as a result of the gains from the sale - the plan's assets were 10% of total assets under management transferred to Prudential - even though the transaction's proceeds were used in a stock buyback.program, the lawsuit charged.

"...the foregoing conduct constitutes a serious breach of defendants' fiduciary duty and flagrant self-dealing," the plaintiffs' lawyers alleged.

The issue of 401(k) fees has been very much in the news this week with a widely covered U.S. House committee hearing on whether such fees need to be more completely disclosed to participants (See Congressional Committee Hears 401(k) Fee Disclosure Testimony ).

Schlichter's firm generated a good deal of retirement industry buzz last year with its batch of excessive fee lawsuits - even while Schlichter insisted the litigation was not part of an organized vendetta. (See  Lawyer: Excessive Fee Suits Not an Organized Anti-Plan Campaign ). One such suit was aimed at Boeing's 401(k) plan (See Details Reported on Boeing 401(k) Fee Suit ).

Schlichter's firm also filed a revenue sharing suit against Illinois-based Kraft Foods (See Kraft 401(k) Fee Suit Lacks Improper Revenue Sharing Charges ).

Finally, in December, the sponsor of a 401(k) plan for employees at an Illinois racetrack sued Principal Financial Group for fiduciary breach over revenue sharing arrangements with mutual funds whose offerings are in Principal's 401(k) product (See Plan Sponsor Sues Principal over 401(k) Fund Revenue Sharing ).

The latest suit is Nolte, Lewis and Mitchell versus CIGNA Corporation, et. al., 07-cv-02046-HAB-DGB, U.S.D.C. Central Dist. of Illinois.

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