Citigroup Hit with 401(k) Suit over ERISA Violations

October 29, 2007 ( - Citigroup has been hit with a lawsuit alleging the financial services giant committed a variety of fiduciary breaches in improperly having its 401(k) plan do business with its affiliates and subsidiaries.

The federal court lawsuit by named plaintiff Marya J. Leber asks that the case be declared a class action, noting that the Citigroup 401(k) has nearly 190,000 participants. Filed by New York attorney David S. Preminger, the suit has been assigned to U.S. District Judge Sidney H. Stein of the U.S. District Court for the Southern District of New York.

Also named in the suit – which alleges violations of the Employee Retirement Income Security Act (ERISA) provisions against self-dealing and imprudent investing – were a variety of the firm’s executives including those on the administrative and investment committees.

The suit said ERISA requires the defendants “to act prudently and solely in the interest of the 401(k) plan and its participants and beneficiaries when selecting investment, products, and services for the 401(k) plan.” The complaint charged: “They did not do so. Instead, they put Citigroup’s interests ahead of the 401(k) Plan’s interests by choosing investment products and pension plan services offered and managed by Citigroup subsidiaries and affiliates, which generated substantial revenues for Citigroup at great cost to the 401(k) plan.”

Specifically, according to the complaint, the defendants chose:

  • mutual funds offered and managed by Smith Barney Fund Management and Salomon Brothers Asset Management,
  • guaranteed investment contracts and a stable value fund offered and managed by Travelers Life & Annuity,
  • trustee services by Citibank, and
  • recordkeeping and other plan services provided by CitiStreet.

Declared the suit: “At virtually ever turn, Committee defendants placed Citigroup’s interests ahead of the 401(k) Plan’s interests. When the Committee defendants terminated an investment option fund, the assets in that investment option were almost always moved into a Citigroup affiliated fund.”

The suit cites as an example a 2003 decision to replace four unaffiliated Van Kampen funds with four Smith Barney funds, “effectively transferring $160 million to the control of Citigroup affiliates.”

The complaint charged that the plan suffered millions of dollars in losses because of decisions to invest what the it said were billions of dollars in affiliated funds, “which resulted in millions of dollars of revenue for Citigroup while delivering poor investment returns for the 401(k) plan.”

Citigroup released a statement in response to the suit: “We just received this complaint and, based on a preliminary review, it is without merit and we will defend ourselves vigorously.”

The complaint is here .