Michigan-based Flagstar Bancorp. has agreed to pay $3 million to participants and beneficiaries of its 401(k) plan as part of a preliminary settlement.

The complaint against the bank alleged Flagstar breached its fiduciary duty by allowing its 401(k) plan to invest in its own Flagstar common stock at a time when bank executives knew such an investment was imprudent.   

The suit was filed on behalf of 401(k) participants in the plan from Dec. 31, 2006 to May 2, 2013. The Department of Labor filed an amicus brief in support of the plaintiffs in which it noted the mortgage-backed investments that Flagstar specialized in were creating significant credit risk.

From early 2007 to mid-2010, Flagstar stock lost 95 percent of its value, according to the DOL brief. The bank was able to avoid collapse by first selling $100 million in equity; secondly by receiving $250 million from the Troubled Asset Reform Program; and finally by securing another $250 million in private funding.

Flagstar denied any wrongdoing as part of the settlement. A hearing is scheduled for Dec. 3 for final approval of the settlement. The $3 million settlement would be paid out to retirees and their beneficiaries following fees and court-approved attorney fees.

The Michigan-based bank operates 11 branches throughout the state and lists assets of $12.7 billion.