Lockheed Martin Case Puts 401(k) Plans On Trial

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There's a trial getting underway in St. Louis today that could have a big impact on the way companies select 401(k)s for their employees. Lockheed Martin is being sued for choosing retirement funds that shortchanged its employees. The case tests the limits of a company's responsibilities to its employees at a time when 401(k)s have become a central part of the nation's retirement system. NPR's Jim Zarroli reports.

JIM ZARROLI, BYLINE: With $26 billion in assets and more than 120,000 participants, Lockheed Martin's 401(k) plan is one of the largest in the country. And attorney Jerry Schlichter says it's also been managed in a way that violates many of the industry's best practices.

JERRY SCHLICHTER: It was something that they did not, we contend, adequately manage, and the results were predictable.

ZARROLI: Schlichter is something of a thorn in the retirement industry's side right now. He's brought class action suits against nearly a dozen companies, including Caterpillar and General Dynamics, for the way they manage their retirement funds. He won a case against North Carolina-based ABB earlier this year. And a suit he brought against the Edison utility company will be heard by the U.S. Supreme Court in February. These cases have helped focus new attention on the way 401(k)s are managed.

Mike Alfred, CEO of BrightScope, a company that rates retirement funds, says 401(k)s have become something of an afterthought at many companies. He says that's probably because they do nothing to boost the company's bottom line. In the worst cases, funds can be chosen by mid-level employees who have little experience selecting investments and are often no match for a fund company's salespeople.

MIKE ALFRED: So especially in the small-plan market, people tend to buy the products that are put in front of them. They don't oftentimes spend a lot of time analyzing alternatives. If they like the person that presented the product and the sales pitch was good, a lot of times that's the product that gets purchased.

ZARROLI: The result is that some employees' retirement money gets put into funds that are poorly managed and charged high fees. Many employees have little understanding of how their funds are operated. So they don't realize how much high fees can erode the value of their savings over time, Alfred says.

ALFRED: It has a significant impact. If you are paying 2 percent over a 30 or 40 year career - that's compounded. I mean, you could be talking about literally hundreds of thousands of dollars.

ZARROLI: These are at the center of the case against Lockheed Martin. attorney Jerry Schlichter says part of their retirement money held by Lockheed's employees was put into something called the Stable Value Fund which charged high fees. In addition, he says, Lockheed's bank, State Street, was hired for fund record-keeping, and it too charged high fees. He says Lockheed could have bid out the business to save its employees money, but didn't. Schlichter says that under federal law companies like Lockheed have a fiduciary duty to their workers.

SCHLICHTER: The employer's duty is to make sure that the fees are reasonable and no more than reasonable. You can't just check out of the scene and say well, it's not our money. As the employer, you've got be familiar with the industry and what fee - reasonable fees are.

ZARROLI: Lockheed declined to do an interview, but it issued a statement saying it believes that allegations of improper management of its retirement plan are false. And it remains committed to defending itself against the allegations at all stages of the litigation. The trial is expected to last about four weeks. Jim Zarroli, NPR News. Transcript provided by NPR, Copyright NPR.