Sears Hit With 401(k) Class Action Over Company Stock

Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...

By Carmen Castro-Pagan

Sears Holdings Corp. kept its own stock as an investment option in the 401(k) plan although it knew or should have known that the retailer was in “extremely poor financial condition,” workers allege in a new lawsuit ( Catafalmo v. Sears Holdings Corp. , N.D. Ill., No. 1:17-cv-05230, complaint filed 7/14/17 ).

The company stock had been “predictably declining since 2010,” but plan fiduciaries continued acquiring and holding Sears stock, according to a lawsuit filed July 14 in the U.S. District Court for the Northern District of Illinois.

The plan’s stock fund lost $4.5 million in 2014 and $12.9 million in 2015, the lawsuit alleges. Sears and it fiduciaries took no action until December 2016, when they froze future purchases of the stock, thus doing “far too little, far too late,” as participants’ retirement savings decreased, the lawsuit said.

This is the second time Sears must defend a class action accusing it of violating the Employee Retirement Income Security Act by retaining its declining stock in the company’s 401(k) plan. In 2007, Sears agreed to pay $14.5 million to settle similar allegations.

In recent years, big-name companies have been sued by workers challenging their employers’ decisions to add poorly performing company stock as an investment option in their retirement savings. Those companies—including Eaton Corp., RadioShack Corp., Whole Foods Corp., Lehman Brothers, JPMorgan Chase & Co., International Business Machines Corp., and BP Plc—defeated the employee charges. But that hasn’t kept other companies’ employees from filing similar lawsuits, including workers at Chesapeake Energy Corp., Seventy Seven Energy Inc., and General Cable Corp.

The lawsuit against Sears was filed by a plan participant who seeks to represent other participants whose plan accounts included investments in Sears stock. The plan had 207,310 participants at the start of 2015, and 56,398 by the end of that year and nearly $2.9 billion in assets, the lawsuit said.

The devastation of the plan’s asset because of the collapse of the stock price, which has fallen 80 percent since 2014, could have been avoided in whole or in part by the plan’s fiduciaries, the lawsuit alleged. Sears could have closed the fund itself to new contributions and directed employee savings into other investment options, the lawsuit said.

Sears’ chairman and chief executive officer, Edward S. Lampert, was also sued.

Lampert is the founder of ESL Investments, a Florida-based hedge fund with $2.8 billion under management, according to data in the Bloomberg Terminal. Lampert, his hedge fund, and Fairholme Capital Management LLC allegedly had an interest in keeping the plan invested in Sears Stock, and in Sears not declaring bankruptcy, the lawsuit said. Lampert, his hedge fund, and Fairholme collectively owned 79.6 percent of Sears’ stock, the lawsuit said.

Sears told Bloomberg BNA it had no comment on the lawsuit.

Siprut PC and Stull Stull & Brody represent the proposed class.

To contact the reporter on this story: Carmen Castro-Pagan in Washington at

To contact the editor responsible for this story: Jo-el J. Meyer at

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Request Pension & Benefits Daily