If you are a large 401(k) plan considering offering in-house funds, be prepared for potential lawsuits.
Lockheed Martin Corporation and its subsidiary investment management company are facing legal action from current and former participants in their 401(k) plans. They are accused of violating fiduciary duties of prudence and loyalty by utilizing an in-house service provider and affiliated target-date funds. The aerospace and defense company is alleged to have taken a “do-it-yourself” (DIY) approach to managing their 401(k) investments, creating “home-grown, ineffective private investment funds,” and charging “excessive and unreasonable fees” to plan assets.
The lawsuit, Fezer et al v. Lockheed Martin Corporation et al, was filed in the U.S. District Court of Maryland and involves three of Lockheed’s 401(k) plans: the salaried plan, the bargaining plan, and the capital plan.
The plaintiffs, represented by by Zuckerman Spaeder, claim that Lockheed violated its fiduciary duties to over 140,000 beneficiaries by selecting and maintaining Lockheed Martin Investment Management Co. (LMIMCo.) as the manager of the 401(k) plans. They also allege that Lockheed offered LMIMCo.’s own target-date funds (TDFs), which were deemed “chronically underperforming” and high-cost, as investment options within the plans. Last year, LMIMCo. began offering a private equity co-investment sleeve within these TDFs. The most aggressive TDFs in Lockheed’s lineup have approximately 7% invested in a private equity fund. The lawsuit states that Lockheed’s choice to utilize its in-house TDFs, which carried “high fees” and demonstrated “poorer performance” compared to those offered by independent investment managers, was “unusual.” Plaintiffs noted that the in-house TDFs were two to five times more expensive than higher-performing TDFs offered by Vanguard. Lockheed designated these in-house TDFs as the only available investment options in the 401(k) plans and made them the default choice. The company also added additional in-house TDFs between March 2019 and this year for younger employees with longer retirement horizons.
Moreover, the lawsuit alleges that Lockheed misled participants in marketing the in-house TDFs, presenting them as the sole investment option necessary for retirement.
