Plan Talk: Something Old, Something New – Building Successful Retirement Partnerships

 In Retirement Planning & Wealth Management

Something old, something new, something borrowed, something blue. The traditional wedding rhyme inspired Retirement Director Ben Rizzuto to contemplate the relationship between a plan sponsor and its participants. Whether it’s a marriage or a retirement plan, it’s important that neither party takes the other for granted.

Key Takeaways

  • Like a marriage, the relationship between a plan sponsor and its participants has normative and legal obligations.
  • Excessive fees, investment policy statement violations, the use of “retail” or expensive shares classes and improper investments have provided the lowest hanging fruit for lawyers representing participants.
  • When it comes to investment selection, process, documentation and consistent monitoring should be a key focus.

Plan Talk: Something Old, Something New – Building Successful Retirement Partnerships
Ben Rizzuto

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Ben Rizzuto: Hey there, everyone, this is Ben Rizzuto and I’d like to welcome you to the Plan Talk podcast series from Janus Henderson Investors.

As you know, in this this series we discuss many of the key developments that we’re seeing in the Defined Contribution and Retirement Plan marketplace, and many of these ideas and issues come from our Defined Contribution in Review guide. So if you haven’t seen the latest edition of the Defined Contribution in Review Guide, be sure to check it out.

Like many of you my family and I have been on the wedding circuit over the past couple of months. These events are always great ways to visit family and friends, dress up and take part in an important milestone for a couple.

During a recent ceremony I was reminded of the traditional rhyme that details what a bride should wear for good luck: something old, something new, something borrowed, something blue. That’s usually where things stop but it actually turns out that the original rhyme’s final line is “and a silver sixpence in her shoe.” Now I have never heard that bit about a sixpence in her shoe before but the original rhyme came from Lancashire County in England and the sixpence in the shoe was a symbol of prosperity.

Anyway, in thinking about that old rhyme and the retirement plan industry I started to think that in a way the relationship between a plan sponsor and its participants is similar to a marriage. There is a partnership between the two, one that has normative and legal obligations, and the hope is that this partnership will lead to the long-term success of both parties.

What’s really interesting, especially when I think about retirement plans, are those legal obligations that plan sponsors have to their participants, especially when it comes to ERISA.

So today we’re going to explore that old rhyme: Something old, something new, something borrowed, something blue. And we’ll see how it can help use think about all of the legal wrangling, lawsuits and issues that have ensnared plan sponsors and their retirement plans over the past several years.

Let’s start with “something old” and to cover off on this bit of the rhyme let’s think about and review some of the major factors and ideas in the 100-plus lawsuits we have seen against plan sponsors.

So if we think about some of the older more noteworthy class action lawsuits in this space we can think about ABB v. Tussey, Tibble v. Edison, Beesley v. International Paper, and Spano v. Boeing. In a couple of these cases we saw settlements, $30 million in International Paper and $57 million in Boeing. In the Edison we actually saw a decision in favor of the plaintiffs, and the ABB case has bounced back and forth between different appeals courts over the years.

While we’ve seen different outcomes in these cases one of the constants is the fact that these are all huge retirement plans with billions of dollars within them.

Along with that there have been a few common complaints or themes that have shown up in these suits.

Those include excessive fees, investment policy statement violations, the use of “retail” or expensive share classes, and improper investments. Of course, there have been others, but these ideas have provided the lowest hanging fruit for the lawyers representing participants. Oh, and on that note, in the past it’s really been one main law firm out of St. Louis that brought most of these cases and really helped to spawn a cottage industry. Like Voldemort (Vol-deh-mort) in Harry Potter, they will in this podcast remain nameless.

But overall it’s been big plans, big settlements, based on a similar set of issues.

So if that was the old, let’s move on to “something new” and look at how these cases have changed over the past several years.

First, let’s start with the new, more novel issues that we have seen plan sponsors sued over. Now this is not to say that the common themes we just talked about aren’t still important. They, in fact, are still very important and we continue to see all of them in current cases. But let’s look at the new tricks lawyers have up their sleeves.

First, and this gets into the umbrella issue of imprudent investments, we’ve seen a few cases that have brought up the idea of stable Value vs. Money Market Funds in plan lineups. Two cases where we have seen this is in Ramsey v. Philips North America and the White v. Chevron case.

In the Ramsey v. Philips North America case which was just filed on May 10 of this year, in it, participants in the $3 billion plan claimed that the lack of a stable value fund cost plan participants $41 million.

More specifically the suit cited that the inclusion of a money market mutual fund was imprudent since stable value funds hold longer-duration instruments and generally outperform money market funds. In this case the plan’s money market fund was said to have provided “microscopically” low returns compared to a stable value fund which would have provided superior returns while preserving capital and liquidity without any greater increase in risk.

Less than a week after the complaint was filed, Philips settled for $17 million, in part saying they had breached their fiduciary duties by offering just the money market fund.

We again saw this issue in the 2016 White v. Chevron case. Here, it was claimed that Chevron failed to offer a stable value fund that would have provided participants “maximum current income” while preserving capital and liquidity without any greater increase in risk compared to money market investments. The complaint again noted that the money market’s returns were “microscopically small” but here we saw a judge dismiss the case saying that offering a money market fund “as one of an array of mainstream investment options along the risk/reward spectrum satisfies ERISA’s prudence requirement.

So what’s the answer when it comes to money market vs. stable value funds? Like many things it depends, but overall, when it comes to investment selection … process, documentation and consistent monitoring are the things plan sponsors need to be doing.

Another novel claim that we’ve seen made by plaintiffs concerns the plan’s advisor. Over the past year or so I can think of a couple cases where the advisor is part of the complaint. In one case, Sandoval v. Novitex Enterprise Solutions, plaintiffs took issue with the compensation of the advisor, saying the advisor’s $125,000 per annum base fee was “excessive given the Plan size.”

Along with that I’ve seen an advisor named in a suit based on the benchmark they used to evaluate funds in the plan lineup. More specifically the suit which is against the New York University 403(b) plan, said the weighted Morningstar benchmark the plan’s advisor selected wasn’t appropriate for a large plan since the benchmark included mostly retail share classes.

One final claim we’ve seen concerns plan assets, more specifically participant information being viewed as a plan asset which should be protected. In one specific instance, Vanderbilt University was sued in part because it allegedly failed to protect plan assets, those being participants’ contact information, their choices of investments, the asset size of their accounts, their employment status, age and proximity to retirement, from the record-keeper. The record-keeper thus had access to this “private and sensitive information” to then market proprietary products and wealth management services to the Plan’s participants.

So those are a few novel claims that we’ve seen. Unfortunately, as we’ve come to find, these lawsuits and the complaints brought against plan sponsors will continue to evolve.

Moving on to “something borrowed” I mentioned New York University and Vanderbilt University in the previous section and while a couple of the claims included in these cases are different, I think we can see lawyers have basically borrowed the playbook that was used in corporate cases and applied it to the 403(b) industry.

As you may know, over 20 universities have been sued by participants over the past couple of years. These cases involve schools that everyone has heard of, like Duke, Yale and MIT, and involve their billion dollar retirement plans. And the issues that are showing up include excessive fees, use of expensive or retail share classes and underperforming or imprudent investments. Along with those we do see allegations of too many investment options and multiple record-keepers, which are more specific to the 403(b) marketplace but overall it’s really quite amazing how similar the allegations are.

Another area where we see others employing the same playbook is in the small plan marketplace. I mentioned that a cottage industry has been created in the retirement plan litigation area, and that industry has now moved downstream, as plans with less than $10 million are being swept up in this current, by a new set of lawyers with little to no ERISA experience.

In fact, one of the local personal injury lawyers here in Denver has now brought three or four cases against retirement plans based alleged fiduciary breaches. So the point is: If the local personal injury lawyer is trying his hand at ERISA litigation, what’s to stop others from doing so as well.

Finally let’s talk about “something blue.” This one is a little tougher because if you follow tradition on your wedding day you wear or carry something that is blue in color, which is hard to do in a podcast. But if we look at the meaning of wearing something blue we find that it is meant to deflect the evil eye as the color blue stands for love, purity and fidelity – three qualities of a solid marriage.

So to signify this I thought we could look at a case that was recently dismissed, since I would submit that the dismissal of the case means that, at least in the eyes of the courts, plan sponsors were faithful, demonstrated by their loyalty and support to the plan and participants.

To do that let’s take a look at the Divane v. Northwestern University case. This case was originally filed in 2016 but was dismissed by the U.S. District Court for the Northern District of Illinois this past May.

Originally when it was filed, the suit argued that even though the university had “eliminated hundreds of mutual funds from its plan menu and selected a tiered structure comprised of a limited core set of 32 investment options” the university still contracted with two separate record-keepers for the retirement plan. Along with that it took issue with underperforming investment options that carried unreasonable fees, use of plan assets and excessive recordkeeping fees overall.

While the dismissal is a positive for plan sponsors, generally, I think it’s important to study what the judge said in his decision because these will become the precedents over which future cases will be argued and could help other plan sponsors escape costly settlements.

Let’s start with the idea of expensive share classes and the idea of active vs passive investments in the plan menu. Here the judge in this case, Jorge Alonso, acknowledged that “all other things being equal, a lower expense ratio is better,” but he then went on to note that “all things are not equal between funds,” and that the participants in this case weren’t limited to active funds, nor were they required to select any specific funds. He noted that “the amount of fees paid were within the control of participants, because they could choose in which funds to invest the money in their accounts.”

Next, the idea of participant contact and personal information as a plan asset came up in this case as well. On this point, Judge Alonso noted that “it is in no way imprudent for defendants to allow the record-keeper to have access to each participant’s contact information, their choice of investments, their employment status, their age and their proximity to retirement, since the record-keeper needs this information in order to serve as record-keeper.”

Finally, the judge’s decision looks at the idea of paternalism in retirement plans. And when you think about paternalism or the generosity of the plan sponsor, this really is an idea that is overarching for everything that we do or don’t do within a plan. Overall the plaintiffs in this case were saying that in many areas the university was not being as paternalistic as it should have been. To that point, Judge Alonso alluded to two Supreme Court cases that I think we may hear about more in the future. He noted that “nothing in ERISA requires employers to establish employee benefits plans. Nor does ERISA mandate what kinds of benefits employers must provide if they choose to have such a plan,” which comes from the 1996 case of Lockheed Corporation v. Spink.

He then went on to reference the Varity Corp. v. Howe case, also from 1996, where the Supreme Court explained that Congress, in creating ERISA, wanted to avoid creating “a system that is so complex that administrative costs, or litigation expenses, unduly discouraged employers from offering welfare benefits plans in the first place.”

He capped it off by saying that “plaintiffs’ theories may be paternalistic but ERISA is not.”

Based on that I wonder if we’ll see more plan sponsors reference not only the Lockheed and Varity cases but also this Northwestern University case as precedents to why they are doing their fiduciary best and why participants should be content with what is being offered in the plan.

Time will tell.

When you think about a marriage there is a certain amount of give and take that occurs. Both partners in a relationship need to make sure they do their parts and truly put in the work to ensure that the partnership works. Without this that partnership tends to fall apart.

The same goes for a retirement plan. It really is a partnership between a plan sponsor and its participants. And there is a give and take that occurs between both. Without it … things won’t work.

Whether it’s a marriage or a retirement plan, I think it’s important that neither party take the other for granted.

As we’ve seen today when that happens … arguments occur and those arguments typically end up in the court system.

But here’s the important thing, while these cases may incrementally help participants or plan sponsors I think we can all agree that increased litigation creates greater animosity and more noise when the goal we should be focused on is how we can improve the retirement plan industry overall. Whether it’s improving plan functioning and design, participant engagement or making sure the increasing amount of retirement plan litigation doesn’t swallow us up.

My hope is that by covering “something old, something new, something borrowed and something blue” we’ve helped you better understand how to think about the plans you work with to ensure that there is a solid marriage between process, fiduciary responsibility and practicality to make sure these issues don’t befall your plan and, who knows, maybe it will end up saving you a sixpence or two for your shoe!

Again remember that the information I covered today comes from our Defined Contribution in Review guide. Not only does it cover legal issues but also best practices, participant trends and regulatory updates.

We’ll be covering these and other issues in upcoming episodes, so be sure to subscribe.

Until next time, I’m Ben Rizzuto and this is Plan Talk.

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