Thursday, March 3, 2011

Did the Participants Really Get Protected by ERISA?

US District Judge Charles R. Breyer of the Northern District of California approved a settlement in the case of Kanawi v Bechtel . The settlement, in a class action case that started back in 2006, relates to Bechtel's failure to use the magnitude of its 401(k) plan assets to get lower fees from vendors, likely in the form of institutional, as compared to retail, share classes.

For background, it is common in the defined contribution industry that recordkeepers will credit a portion of asset management revenues (particularly when the plan uses funds of the recordkeeper's asset management arm) back against fees. Oversimplifying significantly, many funds are available on both an institutional basis and on a retail basis. Retail is the basis (including fees whether embedded or explicit) on which an individual investor might invest in a mutual fund. Institutional is the more favorable basis on which, for example, a large retirement plan might invest in the same (or virtually identical) fund.

After the court failed to grant summary judgment on behalf of defendants (again oversimplifying, a court grants summary judgment on behalf of defendants when even if all of plaintiffs allegations are assumed to be true, defendants would still prevail), Bechtel took the position of looking to settle presumably to protect against an overwhelming verdict.

The settlement called for Bechtel to pay $18.5 million to a settlement fund. Of that amount, approximately $4.85 million is to be paid to the attorneys for services and an additional $1.57 million for expenses. That leaves roughly $12 million to be distributed to the accounts of current participants who were in the plan between January 1, 1992 and September 30, 2010, and in cash to participants during that period who are no longer in the plan. I looked on the Department of Labor website and found that as of the end of 2009, there were more than 19,000 participants in the plan. If I do the math, that's in the neighborhood of $650 per participant. Frankly, that's not a large sum of money. On the other hand, the attorneys made millions from this case.

So, Bechtel is a loser here, but one could certainly argue that they deserved to be a loser. The aggrieved participants were probably made partially whole as compared to where they would have been had Bechtel availed itself of the ability to use institutional funds. And, that leaves the winners. The attorneys!

I'm sorry. I have a lot of friends who are attorneys, and many of them are ERISA attorneys, but this is just wrong. ERISA is the Employee Retirement Income Security Act. Here, it didn't do too much to protect the retirement income security of the aggrieved class of participants, but it sure did wonders for their counsel.

As always, the author of this post is not an attorney and does not provide legal advice. Any efforts of his to explain legal matters while those explanations are intended to be correct should be construed as a lay person's attempt to simplify for the lay reader.


  1. John,

    I was looking for some information about the results of the 2/18/2011 Fairness hearing online, as the settlement website didn't seem to have any further information. It appears that you were able to learn that the settlement was approved by Judge Breyer.

    My comment is about the amount awarded to each participant. As a former Bechtel employee, I was given the opportunity to participate in the settlement, but as I recall from reading the information, if employees did not actively participate in the settlement by returning the correct forms, they would not be eligible for distribution. Was this your understanding as well? If so, the 19,000 person figure you're using in this post may be significantly higher than the number of employees in the settlement.

    What are your thoughts on this?


  2. Jon, that I recall, I got the 19000 figure from the Forms 5500 for the Bechtel and Becon plans. The settlement agreement specifies that anyone who participated in the plan(s) from 1992-2010 (going on memory there, so the years could be wrong) was eligible and could receive some settlement. Amounts of settlements were to be prorated.

    If you'd like me to dig deeper, I can. Let me know.