The latest excessive fee suit targets “wildly excessive compensation,” an allegedly imprudent stable value offering, and the unmonitored use of “float” income.
More specifically, the participant-plaintiffs of Miami, Florida-based Lennar Corp. are raising issues with the recordkeeping/administrative fees (“wildly excessive compensation”) paid by the plan, the prudence of retaining Prudential’s stable value fund, and the use of float income by Prudential (the plan’s recordkeeper).
The lawsuit, filed in the U.S. District Court for the Southern District of Florida (Catenac v. Lennar Corp., S.D. Fla., No. 1:22-cv-23232, complaint 10/5/22), is directed at a plan with approximately $1.2 billion in assets and nearly 13,000 participants. The participant-plaintiffs are represented here by Morgan & Morgan PA.
Looks like those hoping for some clarity on a threshold issue involving ERISA fee litigation will have to wait for another day.
I’m referring, of course, to last week’s ruling by the Supreme Court on the case of Hughes v. Northwestern University et al.—a case that the law firm of Schlichter Bogard & Denton—which seems to have “invented” this class of excessive fee litigation—said was having a “chilling effect” on this type of lawsuit, more precisely their ability to proceed to trial (or settlement). Consequently, ERISA fiduciaries were waiting anxiously for a ruling on the case, which involved allegations that Northwestern University had failed to comply with its fiduciary responsibilities with regard to the options available to plan participants.
Indeed, the allegations in this case weren’t all that different from the litany transgressions outlined in any number of such cases over the years—but in making their case to be heard by the nation’s highest court the plaintiffs’ attorneys (the aforementioned law firm)—had noted (complained?) that suits “with virtually identical” claims were being dismissed out of hand, while other courts were allowing them to go to trial. This they claimed was “…not a factual disagreement about whether the specific allegations at issue clear the pleading hurdle,” but rather “a legal disagreement about where that hurdle should be set.”
Consequently. some clarity as to how, and how much, must be established by those who file the suits before they get to take the issue(s) to trial is timely, to say the least. Or, said another way, how much is “enough.”
Rather, the court had merely determined that there were some prudent alternatives on the menu, and that the participants could choose them if they had an issue with those that (allegedly) weren’t as expensive and that, for that district court, was enough.
One recent line of ERISA litigation involves the actuarial equivalence factors used by defined benefit pension plans. The lawsuits apply both to active defined benefit pension plans and pension plans that have been “frozen” as to future benefit accruals.
Basically, the lawsuits allege that the plan, through the use of out-of-date and “unreasonable” actuarial assumptions and conversion factors, has “overcharged” participants when converting from the Life Annuity Benefit to payment in an alternate payment form.
In many of the cases, the challenge focuses on allegedly outdated mortality tables that do not take improved life expectancy into account. In some situations, the actuarial factors (including mortality table assumption) were established decades ago and have never been updated. In essence, the lawsuits allege that the plan (by not using updated factors and tables) is not paying out the full value of the participant’s benefit when the participant has elected payment in an alternate payment form.
While Democrats in Congress negotiate over trillions of dollars in new spending, the Biden Administration is quietly advancing its agenda through regulation. Witness a little-noticed proposed rule last week by the Labor Department that will add new political directives to your retirement savings.
The Administration says the rule will make it easier for retirement plans to offer 401(k) funds focused on ESG (environmental, social and governance) objectives. In fact, the rule will coerce workers and businesses into supporting progressive policies.
An important Trump Labor rule last fall reinforced that the Employee Retirement Income Security Act (Erisa) requires retirement plan fiduciaries to act “solely in the interest” of participants. The rule prevented pension plans and asset managers from considering ESG factors like climate, workforce diversity and political donations unless they had a “material effect on the return and risk of an investment.”
The Biden DOL plans to scrap the Trump rule while putting retirement sponsors and asset managers on notice that they have a fiduciary duty to include ESG in investment decisions. The proposed rule “makes clear that climate change and other ESG factors are often material” and thus in many instances should be considered “in the assessment of investment risks and returns.”
State and local government pensions assure workers and retirees that they enjoy the same protections as the comprehensive federal law, ERISA provides to corporate participants. That’s simply not true. Don’t count on state law to protect your retirement security.
It has been said that the Law is a blunt instrument, incapable of dealing with all shades and circumstances, with little or no regard for individual situations.
Even where the most comprehensive legal and regulatory framework exists and answers are crystal-clear, your pension is at risk because enforcement or policing of the law is lacking. I have taught U.S. Department of Labor pension investigators. As trained and committed as they are, they’re hopelessly out-gunned by the investment industry. Wall Street runs circles around regulators charged with enforcing pension laws.
However, the vast majority of pensions are not subject to any comprehensive law.
For example, as hard as it is to believe, explain or justify, the approximately $4 trillion in America’s government pensions is not protected by any comprehensive federal or state law.
The U.S. Supreme Court on Friday agreed to consider the appeal of Northwestern University employees who say the university mismanaged their 403(b) pension investments. The lawsuit against Northwestern was one of roughly 20 filed in 2016 charging that wealthy and prestigious universities failed to fulfill their fiduciary duty by charging unreasonable fees and offering too many investment options.
Lower federal courts sided with Northwestern in dismissing the employees’ claims, but in their appeal to the Supreme Court, lawyers for the plaintiffs argued that the federal appeals courts had issued divided rulings on key questions in similar lawsuits.
The Ninth Circuit Court of Appeals recently addressed several issues of first impression in Bafford v. Northrop Grumman (9th Cir. April 15, 2021), a lawsuit involving retirees who received vastly overstated pension benefit estimates from the plan’s recordkeeper reminds employers of the importance of careful administration. The case highlights the need to ensure that electronic recordkeeping systems and tools align with the plan terms. Participant requests for plan or benefit information using online portals or other electronic means still demand timely and accurate responses as required by ERISA’s disclosure requirements.
On appeal from the district court, the Ninth Circuit agreed that the participants’ ERISA fiduciary claims should have been dismissed, aligning with the First and the Fourth Circuit’s view that a named fiduciary is only liable for a fiduciary breach if they are performing a fiduciary function. The court said that calculating pension benefits using a pre-set formula is a ministerial function, not a fiduciary function. So a miscalculation error would not create a breach of fiduciary duty claim.
A dramatic, recent example of this dilemma occurred in a Massachusetts district court proceeding, when an employer agreed to a $59.17 million settlement in a proposed ERISA class action accusing it of using outdated mortality rates to calculate pensions. Cruz v. Raytheon Co., Mass. Dist. case number 1:19-CV-11425-PBS, Feb. 16, 2021.
The employer had argued in its motion to dismiss that the retirees failed to make the case that the plan violated ERISA by unreasonably using a mortality table created in 1971 and a 7% interest rate to calculate retirees’ alternative annuity benefits it said would be “actuarially equivalent” to the plan’s benefits. The employer argued that its conversion factors for determining the alternative annuity benefits were reasonable and that the retirees were attempting to force their own arbitrary actuarial assumptions. The employer further asserted that under ERISA, employers sponsoring pension plans have wide discretion in determining which actuarial assumptions or conversion factors can be used, requiring only that the single life annuity (SLA) normal form of benefit is equivalent by actuarial standards.
Author(s): Jeffrey D. Mamorsky, Richard A. Sirus, Greenberg Traurig, LLP
I am not personally involved with the success or failure of these pension funds because I am not, nor do I have any family members enrolled, in either of the pensions.
The last report I saw (from 2019?) stated the City of Kankakee taxpayers’ annual funding of the pensions was at or close to $3 million. It would be nice if the “windfall” the city’s representatives receive would take some of the burden off the backs of the taxpayers of the city. Since it wasn’t included in the several ideas of the distribution of this “windfall,” I would hope that it could be. It would be wonderful to have this albatross removed from the necks of the city’s taxpayers.
If all pension providers would have been included in the Employee Retirement Income Security Act of 1974 (ERISA), this problem would probably not exist. However, US Congress in its usual passing of legislation exempted all governments (federal, state, county and local). The federal law sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans.
Author(s): David Cox
Publication Date: 27 March 2021
Publication Site: Daily Journal of Kankakee, Illinois
Further, under EPPRA, the interest rate used to calculate withdrawal liability for plans receiving assistance is limited. The interest rate used to calculate withdrawal liability would be capped, in part, by subsections of ERISA, plus 2%, which would currently be approximately 5%. Of course, the lower the interest rate used by a plan for this purpose, the higher the resulting employer withdrawal liability.
Importantly, less than 15% of the 1,400 multiemployer pension plans will receive financial assistance. Accordingly, the bulk of employer obligations to multiemployer plans, even those that are significantly underfunded, will be unaffected by EPPRA. With respect to employers who contribute to plans that receive EPPRA assistance, PBGC is expected to issue guidance that would limit (in whole or in part) the benefit of such assistance to employers.
The impact of EPPRA’s special financial assistance on contributing employers will largely depend on PBGC regulations and guidance. Employers who are currently confronted with an immediate decision regarding withdrawal from a multiemployer pension plan (for example, employers in the middle of labor negotiations) likely will need to exercise patience pending the issuance of PBGC guidance.
Author(s): Paul A. Friedman, Robert R. Perry, David M. Pixley
The Biden administration will review a recent Department of Labor rule stipulating that ERISA plan fiduciaries cannot invest in “non-pecuniary” vehicles that sacrifice investment returns or take on additional risk.