Northrop Grumman Excessive Fee Case Moves Forward

Noteworthy about the case is that a challenge to fees provided to the recordkeeper via an arrangement with Financial Engines is filed against the plan sponsor and not the recordkeeper as in other suits that have been dismissed.

A federal judge has certified class action status for a lawsuit alleging that Northrop Grumman engaged in self-dealing and failed to secure reasonable service fees for its 401(k) plan.

According to the original complaint, the defendants “acted to benefit themselves and Northrop by paying plan assets to Northrop purportedly for administrative services Northrop provided to the plan, which were not necessary for administration of the plan or worth the amounts paid. Defendants also caused the plan to pay unreasonable recordkeeping fees to the plan’s recordkeeper and mismanaged the plan’s emerging markets equity fund.”

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The plaintiffs also accuse the plan and its administrative and investment committees of allowing its recordkeeper to receive fees from an agreement with Financial Engines to provide participants with investment advice. Other lawsuits have challenged fees paid to recordkeepers from arrangements with Financial Engines. However, unlike the Northrop Grumman complaint, these lawsuits were filed against the recordkeepers and not the plan sponsors. In two cases—a lawsuit against Xerox HR Solutions and a lawsuit against Voya Financial—a federal judge dismissed the claims, saying the plan sponsor was the fiduciary responsible for negotiating fees for plan providers.

In certifying the class, U.S. District Court Judge Andre Birotte Jr. of the U.S. District Court for the Central District of California found the plaintiffs have adequately established Article III standing through evidence that shows named plaintiffs were participants in the emerging markets fund and the Financial Engines account. In addition, the plaintiffs have proffered evidence that since September 9, 2010, there have been at least 100,000 active participants in the plan, and the defendants do not appear to dispute that the plaintiffs have satisfied the numerosity requirement for class certification.

As to the commonality requirement, the defendants assert that it is impossible to determine whether this claim is common among all members of the class because the plaintiffs do not allege the “tipping point” at which the fees paid for recordkeeping became unreasonable. However, seeing as recovery is sought for losses to the plan, the question of when the fees became unreasonable is a common question, Birotte decided. “There will be only one answer because the relevant consideration is the effect of defendants’ conduct on the plan as a whole,” he wrote in his order.

The defendants also suggest that commonality cannot be established because various defendants served as fiduciaries under the plan at different times, and the class members were not all participants in the plan at the same time or for the same duration. However, Birotte again found that differences in participation by the class members does not defeat the fact that the question of whether the defendants breached their fiduciary duties to the plan is common to all plan participants’ claims and will generate answers common to all of the putative class members.

As for the typicality requirement for class certification, Birotte said, “Given that the focus in ERISA fiduciary breach cases is on the defendants’ conduct, and that the first amended complaint specifically alleges plan-wide fiduciary breaches and prohibited transactions, the court finds the typicality requirement satisfied.”

The order notes that “the party seeking certification bears the burden of showing that . . . at least one requirement of Rule 23(b) ha[s] been met.” Given that the plaintiffs assert Employee Retirement Income Security Act (ERISA) Section 502(a)(2) and (3) claims on behalf of the plan and allege breaches of fiduciary duty by the defendants that will, if proved, affect every plan participant, Birtotte concluded that “prosecuting separate actions by or against individual class members would create a risk of . . . adjudications with respect to individual class members that . . . would be dispositive of the interests of the other members not parties to the individual adjudications or would substantially impair or impede their ability to protect their interests.”

While he found class certification proper, Birotte modified the class. “Because the future participants will receive the benefit of any injunctive relief awarded, the court excludes future participants from the class,” he wrote.