Hartford Settles a 401(k) Class Action and Agrees to 'Revenue-Sharing' Disclosures

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The Hartford (HIG) is a big player in the 401(k) market. According to its website, it administers over 30,000 plans, with $41 billion in assets under management on behalf of 1.6 million plan participants. But in a settlement of a class action, announced Feb. 17, Hartford agreed to pay $13.8 million to retirement plans that used it as a service provider between November 2003 and the date of the settlement. Hartford also agreed to make transparent disclosures in the future about so-called revenue-sharing payments it receives from mutual funds, including details of the amounts of these payments.

The settlement stems from a class action against Hartford brought by Phones Plus on behalf of that company's retirement plan and all others "similarly situated." The case had been pending in the U.S. District Court for the District of Connecticut (Phones Plus, Inc. v. Hartford Life Insurance Company et. al., case no. 3:06-cv-1835). The complaint alleged that Hartford's receipt of revenue-sharing payments from mutual funds is a breach of Hartford's fiduciary duty to the plans and a violation of ERISA, the federal statute governing retirement plans, among other allegations.

Revenue-sharing payments are widely considered to be kickbacks paid by fund families to 401(k) plan administrators. In exchange for these payments, the fund's adviser or record keeper agrees to include the funds among the investment options available to plan participants.

A Good Step, but More Is Needed


Many investor advocates (myself included) believe these payments are contrary to the best interest of plan participants, who are entitled to have the best available funds included in their plans. Revenue-sharing payments may influence the administrator's fund selection, resulting in the inclusion of funds willing to make the required payments, regardless of the fund's merits.

While this settlement is a positive development, which recognizes the uncertainty of litigation over this issue (and others), it doesn't go far enough. Even if an administrator discloses to plan participants that it's making revenue-sharing payments, participants can do little about it.

This pernicious practice should be illegal. Since it's unlikely that Congress will enact legislation prohibiting it, employers should insist that their 401(k) advisers and recordkeepers don't engage in it. Instead, all fees should be arms-length and fully disclosed. Mutual funds selected for plan participants should be based solely on merit.

Advisers to retirement plans should agree to be real fiduciaries to the plan's participants and should accept in writing 100% of the liability for the selection, monitoring and replacement of funds in the plan. Nothing less will protect plan participants from the high costs, poor investment choices, conflicts of interest and lack of accountability that are so common now in 401(k) plans.

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