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Sears being sued for holding its stock in retirement plan

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http://www.retaildive.com/news/sears-sued-for-holding-its-stock-...

From the article:
The complaint does not mince words about Sears' business performance, and it lists the many documented issues Sears has faced in recent years as proof that the stock was an improper choice for an investment fiduciary. Among those issues are “drastic changes in the retail industry, which Sears failed to adapt to compromised Sears’s financial health, and regularly forced Sears to divest its most valuable assets in order to pay operating and interest expenses so that it could continue losing money,” as well as “secular shifts in the retail industry [that] rendered Sears highly unlikely to survive in the near-term or long-term.”

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More of a Finance than a DD right?

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I wonder what percent of the 401k plan is in Sears stock. Whatever happens here, Sears employees, stockholders, 401k plan participants, all will lose. The writing is on the wall. Sears is destined to end up in bankruptcy, with Sears executives not doing anything to improve things. I go into a Sears store and leave thinking they want to go out of business.

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This is also exactly why when you leave an employer you should roll your 401k into an IRA.

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Its not clear how the 401k worked exactly. Was there multiple investment choices and Sears stock was one of the options? Or did they force all the money into Sears? It seems that the Sears stock was only one possible option, but I'm not sure.

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Yeah, I worked for a big public company for a while and company stock was just one of the 401k fund options. And they capped it at 20% of your contributions or total balance if you did reallocations. You could keep >20% when the company fund outpaced your others, but couldn't shift anything more to the company fund once that hit 20% of your total. That seemed like a reasonable safeguard against employees getting ruined if the company went under. And like most, it was a lot more stable and likely to survive than SHLD.

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Found this from 2012-2013 :
https://www.sec.gov/Archives/edgar/data/1310067/0001310067140000...

If I'm reading it right, about 2% of the funds were in Sears stock. Not too much damage then.

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jerosen said:   Its not clear how the 401k worked exactly. Was there multiple investment choices and Sears stock was one of the options? Or did they force all the money into Sears?  It seems that the Sears stock was only one possible option, but I'm not sure.
If they did that - "force all the money into Sears stock" - then that smacks heavily of Enron in 2001, and I thought those shenanigans had long since been curtailed by Federal laws passed since that time.  If Sears did that, then the Sword of Damocles needs to come down upon their heads. Hard.

If they did not do that - then they did something else.  If they did something else, then what?  If they did nothing more than simply mention Sears stock as an option - then the question must be asked - who, among the employees of Sears, the citizens of the US, or for that matter any of the citizens of the world who have Internet access - has not heard about the problems faced by Sears stock?   Who remains, yet, an ingenue - for Sears stock?  Give me a break!      

C'mon.  At some point we have to say - look.  We have the most information-intensive society in the history of the world.  Our biggest problem here is not getting data, it is in filtering the massive amount of data that we do get.

How is it someone else's fault if we are incapable of doing that correctly?
 

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jerosen said:   Its not clear how the 401k worked exactly. Was there multiple investment choices and Sears stock was one of the options? Or did they force all the money into Sears?  It seems that the Sears stock was only one possible option, but I'm not sure.
  I just helped my brother move his money out of the plan and I can tell you that Sears stock was an option -- and only an option. They actually had pretty decent options in the plan, other than Sears stock.

Sears reserved the option to do their matches in Sears stock, but they suspended their matches during the financial crisis in either 2008 or 2009 and never reinstituted them.

 

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Sears just accounced Today they are partnering with Amazon to sell appliances on Amazon.com

stock went up 18%

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fw9999 said:   
jerosen said:   Its not clear how the 401k worked exactly. Was there multiple investment choices and Sears stock was one of the options? Or did they force all the money into Sears?  It seems that the Sears stock was only one possible option, but I'm not sure.
If they did that - "force all the money into Sears stock" - then that smacks heavily of Enron in 2001, and I thought those shenanigans had long since been curtailed by Federal laws passed since that time.  If Sears did that, then the Sword of Damocles needs to come down upon their heads. Hard.

If they did not do that - then they did something else.  If they did something else, then what?  If they did nothing more than simply mention Sears stock as an option - then the question must be asked - who, among the employees of Sears, the citizens of the US, or for that matter any of the citizens of the world who have Internet access - has not heard about the problems faced by Sears stock?   Who remains, yet, an ingenue - for Sears stock?  Give me a break!      

C'mon.  At some point we have to say - look.  We have the most information-intensive society in the history of the world.  Our biggest problem here is not getting data, it is in filtering the massive amount of data that we do get.

How is it someone else's fault if we are incapable of doing that correctly?

  

First, its been confirmed that Sears stock was only an option.   So clearly thats not as bad as if their 401k was in Sears stock *only*.

yes buying Sears stock is a dumb move.   

The argument here though is that the plan administrator violated their fiduciary responsibility by providing Sears stock as an option.

The idea is that anyone should know that buying Sears stock is such a bad idea that the plan administrator shouldn't even offer it as an option.    A plan administrator has a responsibility to do whats in the best interest of the plan participants and offering them a crappy investment in a company doomed for bankruptcy is not in their best interest.

Yes the plan participants should know better than buying Sears as well.   But thats besides the point.    The point is the administrator shouldn't have let them buy Sears.

I don't know that I agree with the lawsuit really, but thats their point and I can see the logic.  If you were building a 401k would you pick Sears as an investment?   

 

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jerosen said:   
The argument here though is that the plan administrator violated their fiduciary responsibility by providing Sears stock as an option.

The idea is that anyone should know that buying Sears stock is such a bad idea that the plan administrator shouldn't even offer it as an option.    A plan administrator has a responsibility to do whats in the best interest of the plan participants and offering them a crappy investment in a company doomed for bankruptcy is not in their best interest.

Yes the plan participants should know better than buying Sears as well.   But thats besides the point.    The point is the administrator shouldn't have let them buy Sears

I don't know that I agree with the lawsuit really, but thats their point and I can see the logic.  If you were building a 401k would you pick Sears as an investment?   

 

  

That logic MIGHT be viable, if SHLD's auditors were releasing 'going concern' opinions at the time. If the audit letter contains something like "These factors raise substantial doubt about the company's ability to continue as a going concern", then yes, you may go to court and argue that the plan administrators were remiss in their duty to offer it as a 401k plan option. Otherwise, you're just filing a frivolous action.

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jerosen said:   
First, its been confirmed that Sears stock was only an option.   So clearly thats not as bad as if their 401k was in Sears stock *only*.

yes buying Sears stock is a dumb move.   

The argument here though is that the plan administrator violated their fiduciary responsibility by providing Sears stock as an option.

The idea is that anyone should know that buying Sears stock is such a bad idea that the plan administrator shouldn't even offer it as an option.    A plan administrator has a responsibility to do whats in the best interest of the plan participants and offering them a crappy investment in a company doomed for bankruptcy is not in their best interest.

Yes the plan participants should know better than buying Sears as well.   But thats besides the point.    The point is the administrator shouldn't have let them buy Sears

I don't know that I agree with the lawsuit really, but thats their point and I can see the logic.  If you were building a 401k would you pick Sears as an investment?   

 

  By that logic, if this lawsuit gets upheld, it will open the door for hundreds of lawsuits against administrators that say . . . only allow annuities in their retirement plan.
Or only allow cruddy mutual funds that have 4% fees.
or no mutual funds where there's no low fee/whole stock market fund.

Or maybe I'll sue my plan administrator because it offers a "cash" option when I could choose a diversified fund and make 10% a year. Obviously the cash option is not in the best interest of plan participants if it performs worse than other options in the plan.

I'm a bit tongue and cheek. Sears stock was just an option provided. No one is under any obligation to purchase the worst option in their retirement plan. IANAL, but I think this has no chance of success unless there's facts I'm unaware of.


 

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imbatman said:   
jerosen said:   
First, its been confirmed that Sears stock was only an option.   So clearly thats not as bad as if their 401k was in Sears stock *only*.

yes buying Sears stock is a dumb move.   

The argument here though is that the plan administrator violated their fiduciary responsibility by providing Sears stock as an option.

The idea is that anyone should know that buying Sears stock is such a bad idea that the plan administrator shouldn't even offer it as an option.    A plan administrator has a responsibility to do whats in the best interest of the plan participants and offering them a crappy investment in a company doomed for bankruptcy is not in their best interest.

Yes the plan participants should know better than buying Sears as well.   But thats besides the point.    The point is the administrator shouldn't have let them buy Sears

I don't know that I agree with the lawsuit really, but thats their point and I can see the logic.  If you were building a 401k would you pick Sears as an investment?   

 

  By that logic, if this lawsuit gets upheld, it will open the door for hundreds of lawsuits against administrators that say . . . only allow annuities in their retirement plan.
Or only allow cruddy mutual funds that have 4% fees.
or no mutual funds where there's no low fee/whole stock market fund.

Or maybe I'll sue my plan administrator because it offers a "cash" option when I could choose a diversified fund and make 10% a year. Obviously the cash option is not in the best interest of plan participants if it performs worse than other options in the plan.

I'm a bit tongue and cheek. Sears stock was just an option provided. No one is under any obligation to purchase the worst option in their retirement plan. IANAL, but I think this has no chance of success unless there's facts I'm unaware of.


 

  
I don't think its the as saying cash or annuities are bad.   Theres legit arguments for investing in things like cash or annuities.   If you're risk adverse or want  to protect principal then those are better choices than high volatility stock markets.  Cash isn't a "bad" investment.  Its just a different kind of investment.   There are legit arguments and reasons to be in cash.   

Sears is doomed for bankruptcy and therse no good reason to invest in it.    (At least this is the argument of the plantiffs.   )   I'd tend to agree.    

I could see a legit argument that mutual funds with excessively high fees shouldn't be offered by investment plans and that these aren't good choices for a fidiciary.   But then you have to come to agreement on how high of a fee is "too high".   A 5% load may be defensible.   (at least in court)    Those fees are a cost of providing a service and it may be hard to argue in court that a mutual fund manager isn't worth fees. 


Would you in good conscious recommend to anyone that they buy and hold Sears stock for their retirement account??
By comparison might there be legit reasons to hold some money in cash or even an annuity?   


On the other hand it really seems that you can't expect a company to say their own company is doomed and recommend against buying its stock.    You don't want the people running a company to have abandoned hope on the company's future.   And they'd have to agree that Sears is doomed in order to feel it neessary to remove Sears stock from the 401k options.   

Yeah I don't know if the lawsuit has any chance of success.   
 

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jerosen said:   
Would you in good conscious recommend to anyone that they buy and hold Sears stock for their retirement account??
By comparison might there be legit reasons to hold some money in cash or even an annuity?   


 

  My conscience would feel the same about recommending anyone buy and hold Sears and suggesting they purchase a Mutual Fund with 5% fees. I'd feel like I was offering advice to fleece them equally either way.

There are legit reasons to hold money in cash or an annuity. I'm not saying they're BAD. I'm just saying they typically perform worse than most other 'normal' (i.e. low fee Vanguard funds) options in a 401(k). This legal argument seems to hinge on the concept that it's irresponsible for a plan administrator to offer options that are worse than other options. Does it matter how much "worse" the option is? Who draws that line?

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imbatman said:   
... Does it matter how much "worse" the option is? Who draws that line?

  
Yeah I think the question is how much "worse" of an investment is acceptable or not.

Thats up to the court to decide.

And also cash, vs annuity vs bonds, vs stock is not "better" or "worse" really since they are different in nature.    A high return yet high volatility stock fund may be a poor choice for someone who's 98 years old but cash or an annuity might be a better choice for them.

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jerosen said:   

And also cash, vs annuity vs bonds, vs stock is not "better" or "worse" really since they are different in nature.    A high return yet high volatility stock fund may be a poor choice for someone who's 98 years old but cash or an annuity might be a better choice for them.
 

  At certain points in time, Sears stock was a high return high violatility stock. So in that example, there's not much impactful difference between owning Sears stock and owning a fund.

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This is ridiculous. It's standard for a publically traded company to include its own stock as an option in their 401k plan.

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Having been around the investigation of the Enron collapse and done securities fraud for the Federal Public Defender, I don't see overt mismanagement or falsification of SEC filings. The attorney who filed this one may have to pay Sears' legal fees under Rule 11.

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