U.S. District Judge Terry R. Means of the U.S. District Court for the Northern District of Texas ruled that participants had not put forth a strong enough case to overcome the legal presumption that it was prudent to include RadioShack stock as a 401(k) investment. However, according to the ruling, Means turned aside a demand to dismiss Employee Retirement Income Security Act (ERISA) fiduciary breach allegations over the employer selecting Putnam Funds as investment options.
Participants argued that Putnam Funds were imprudent investment choices because they have performed below average, had excessive fees, and because the funds incurred significant expenses as a result of fines from the Security and Exchange Commission and settling lawsuits filed as part of the market timing/late trading controversy several years ago.
Means pointed out that the allegations regarding the Putnam Funds were about their performance and not just about their fees. Noting that the Putnam Funds made up the majority of the investment options, Means said he was unconvinced the claim should be dismissed at its early stages.
Based on the Supreme Court’s recent LaRue decision on the rights of individual participants to pursue fiduciary breach claims, Means refused to throw out the fiduciary claims even though the former employees had already taken full plan distributions.
A group of current and former RadioShack employees filed lawsuits in 2006 and 2007 against the company and fiduciaries of the company’s 401(k) plan and supplemental stock purchase plan. The lawsuits were consolidated in early 2008.
The lawsuit alleged that the plan fiduciaries breached their ERISA duties by permitting plan investments in RadioShack stock, despite knowing damaging information about RadioShack’s business that participants said made those investments undesirable. In particular, the employees charged that the fiduciaries knew RadioShack was facing a $62 million write-down of obsolete or unmarketable inventory, but made statements to the contrary and held and continued to invest plan funds in RadioShack stock.
Means said the employees could not overcome the presumption of prudence attached to using company stock in a 401(k) plan by pointing to an 8.04% drop in the price of RadioShack’s stock.
The ruling in Maxwell v. RadioShack Corp. (In re RadioShack Corp. “ERISA” Litigation),N.D. Tex., No. MDL 1875, 3/31/08, is available here .
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