2 Critical Lessons Learned from Latest 401k Fiduciary Fail

Employees misled about progress of company's 'transformative plans'

401k claim centered on inflated stock prices.401k claim centered on inflated stock prices.

Retail giant J.C. Penney will pay $4.5 million to current and former participants in the company’s 401k plan as part of a settlement approved by a Texas judge.

The Dallas Morning News reports that the Plano-based Penney was sued over losses suffered over inflated stock prices which occurred as a result of false and misleading statements made by controversial former CEO Ron Johnson, a former Apple executive hired by the board-of-directors on the advice of activist investor Bill Ackman. Johnson was brought in as part of a high-profile attempt to turn the company around amid lagging sales and low employee morale.

The lawsuit said 401k plan participants were misled about the progress of Penney’s “transformative plans” as pricing changes and new vendor shops were being constructed in the stores, according to the paper.

The case illustrates the danger of investing 401k assets in employer stock, something more 401k advisors are advising against due to a lack of diversity in the participant’s plan and the potential detrimental effects of headline risk. A second, and interesting point to be made is the potential benefits of purchasing fiduciary insurance, as the the settlement is covered by J.C. Penney’s insurance policy.

The complaint quoted Johnson at a two-day meeting in New York on Jan. 25 and 26, 2012 attended by more than 700 analysts and reporters saying, “We fully expect that the bold and strategic changes we are making to operations will result in improved profitability. This should enable us to fund the transformation of jcpenney (sic) store experience, while at the same time returning value to shareholders with steady earnings growth.”

The company said Friday that that its comparable store sales for the combined nine-week November and December period resulted in a (0.8) percent decline over the same period last year, which equates to a 3.1 percent positive two-year stack of comparable store sales for the same time period. The company also reaffirmed its full-year EBITDA target of $1 billion for fiscal 2016.

It will report its full fourth quarter and fiscal 2016 results on Feb. 24.

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