Northrop Grumman has agreed to pay $12,375,000 to settle a class action brought under the Employee Retirement Income Security Act (“ERISA”) by participants in its 401(k) plan. The parties reached the initial terms of this settlement last year minutes before the start of the trial.

The plaintiffs alleged in their complaint that the company’s administration of the 401(k) plan harmed the plan’s participants by using a costly management strategy for a risky investment fund and by using plan assets to overpay for administrative services.

The long legal battle began in 2006 with a related lawsuit alleging that the plan was paying excessive administrative fees. That case was settled for $16,750,000 in 2017, but it limited the damages period to May 11, 2009. The participants of the 401(k) plan alleged that they continued to be charged excessive fees after the damages period in the first lawsuit ended and the current class action was brought in 2016 on similar claims. By August 2019, the only claim that remained in the case asserted that Northrop violated its fiduciary duties by choosing an active-management style for the emerging markets fund instead of a low-cost passive-management style. Northrop switched to a passive management style in 2014.

The proposed $12,375,000 settlement fund will be used to pay participants of the 401(k) plan, $25,000 incentive payments to each of the six named plaintiffs, attorneys’ fees and costs. The court has set a preliminary approval hearing for the settlement on January 31^st.

The important take-away for employers who act as fiduciaries of their benefit plans is that they are obligated to act both substantively and procedurally prudent at all times. A fiduciary can aid its defense in a future lawsuit by documenting the processes used for all decisions connected to the administration of the plan. A plan administrator does not have to be omnipotent but must be able to show the processes leading to the ultimate decisions were prudent.