Lockheed Martin Asks US Supreme Court to Review Class Cert Decision

On October 9, 2013, the defendants in Abbott v. Lockheed Martin Corporation filed a petition for writ of certiorari in the United States Supreme Court seeking to have the 7th Circuit’s recent class certification decision reversed. For our non-lawyer readers, one major difference between Circuit Courts, such as the 7th, and the Supreme Court, is that in an ERISA case such as Abbot the justices of the Supreme Court vote on whether to hear an appeal whereas Circuit Courts must hear any appeals filed because litigants are guaranteed at least one level of appellate review after their cases are heard in a district court.

The petition presents the following question: “Whether a plaintiff has standing to represent a class where the defendant’s alleged misconduct did not cause him harm.” Lockheed Martin argues that the Seventh Circuit’s holding that Plaintiffs do have standing even though they “do not appear to have suffered any damages,” conflicts with decisions by the Third, Sixth, Eighth, Tenth, and Eleventh Circuits. For those interested, here is a good explanation as to exactly what standing means. I will simply summarize it as the ability for a party to bring a claim in a court.

Pursuant to Supreme Court rules, plaintiffs have 30 days in which to file a brief in opposition to the petition. Assuming that plaintiffs file their opposition on the deadline (November 8, 2013), the petition will be distributed for the Supreme Court’s conference of December 13, 2013 for a vote from the justices. If the case is accepted (or said another way: if the petition for a writ of certiorari is granted), this means that the Supreme Court then asks for full briefing by both sides and almost always oral arguments will be scheduled before the 9 justices in Washington, DC.

Our Thoughts

As regular readers know, I am not in the business of tea leaf reading. After years of litigating ERISA cases in my previous career, I have learned anything is possible. Only time will tell if the Supreme Court finds it necessary to take the case to resolve the “circuit split” that Lockheed Martin alleges related to the question of standing. However, I will repeat this Question and Answer from the Supreme Court FAQ page:

How many cases are appealed to the Court each year and how many cases does the Court hear?

The Court receives approximately 10,000 petitions for a writ of certiorari each year. The Court grants and hears oral argument in about 75-80 cases.

Are These Fees Unreasonable? – Part 3 of 3 – Recordkeeping Fees

In the final post in our series entitled “Are These Fees Unreasonable?” we address Recordkeeping Fees. (For the two previous posts, see Are These Fees Unreasonable? – Part 1 of 3 – Inv. Advisory Services and Are These Fees Unreasonable? – Part 2 of 3 – Inv. Management Fees)

To recap, FRA PlanTools offers a Benchmarking Report through its web based PlanTools Risk Management System. The report benchmarks the fees paid by a retirement plan for the services rendered against other plans of similar size by plan assets or participant count using a proprietary, independent and objective database.

As a service to the industry for the purpose of starting or continuing the conversation about fees, we are publishing our internal data for the 95th percentile of fees entered into our system for (1) Investment Advisory Services, (2) Investment Management Fees, and (3) Recordkeeping Fees. What this means is that 95% of the retirement plans in our system pay at or less than the amounts found in the charts below. The data was pulled from our system on June 30, 2013.

I think this chart is especially relevant this week with the proposed settlement in the excessive fee case filed against International Paper. One of the allegations there was that the plan overpaid for recordkeeping by $58 million because it was paying $112 a head rather than $52. But how/why does this apply to a plan with less than $10 million in assets? Because the fiduciary duties are the same. Regardless of the size of the plan, the fiduciaries have an obligation to ensure that the fees paid from plan assets are reasonable. One of the most cost effective ways to do that is through benchmarking. Bottom line: if your plan or a plan that you service is paying anything close to the numbers below, it is time to grab the bull by the horns and figure out why.

Click here to download the infographic in PDF form: FRA PlanTools – Are These Fees Unreasonable – Part 3 – Recordkeeping Fees.

FRA PlanTools - Are These Fees Unreasonable - Part 3 - Recordkeeping Fees

 

Breaking: International Paper Settles Excessive Fee Case for $30 Mil.

Today, October 1, 2013, the parties in Beesley v. International Paper filed papers indicating they have settled their lawsuit and are now seeking approval of the district court. In total, International Paper (“IP”) agreed to pay $30 million and submit to extensive affirmative relief. Here is a copy of the motion seeking settlement. The settlement agreement is attached to the motion as Exhibit A.

Background

The Beesley case was one of the original excessive fee cases filed on September 11, 2006 by current and former participants in IP’s hourly and salaried 401(k) plans. Of interesting note, a previous order granting class certification was vacated on IP’s Rule 23(f) appeal to the 7th Circuit along with the original class certification in the Spano v. Boeing Company case. As we’ve written about previously, the 7th Circuit has recently clarified its jurisprudence on class certification of ERISA fiduciary breach cases, which may or may not have had a direct impact on the parties’ settlement in Beesley. It’s also worth noting that the district judge in Spano is the same judge in Beesley, and less than 2 weeks ago he granted class certification in Spano on plaintiffs’ amended motion.

The Allegations

In the Second Amended Complaint, plaintiffs alleged the following fiduciary breaches:

  1. Excessive Administrative Fees. Participants paid $58 million in unreasonable fees for the recordkeeping administration of the Plans. IP was informed in 1997 that the $112 per participant fee for that year was far in excess of what should be paid. In 2008, after the lawsuit was filed, IP finally negotiated a lower recordkeeping fee to $52 per head.
  2. Imprudent Company Stock Fund. IP made its match of employee contributions in Company Stock Fund (CSF) units, and required the employee’s own contribution that was matched by IP to be invested in company stock. IP forced all Plan participants to invest in the CSF by imposing restrictions that prohibited participants from divesting their CSF holdings until age 55 – and even then, participants could only divest 20% per year. This resulted in the CSF holding up to 57% of the Plans’ assets, with over one-third of participants holding over 90% of their account balances in the CSF. At the same time, IP eliminated IP stock in 1998 in the corporate managed defined benefit plan because they recognized it was an investment that was expected to perform poorly. The alleged damages were $2 billion.
  3. Imprudent Large Cap Stock Fund. In 2002, IP Defendants removed the Plans’ Vanguard S&P 500 Index fund, an allegedly inexpensive passive investment, and replaced it with an allegedly imprudent actively-managed fund, the Large Cap Stock Fund (LCSF). IP expanded the investments of the LCSF beyond the stocks in the S&P 500 index to a far broader range of 900 stocks, which more closely resembled the Russell 1000 Index. The LCSF charged excessive fees in light of their risk, was expected to and did underperform the Russell 1000 Index, and IP improperly compared performance to the S&P500, an inappropriate benchmark which made returns look better than they were. The alleged damages were between $58 million and $69.4 million.
  4. Securities Lending. A large portion of the assets of both 401(k) plans and IP’s corporate pension plan were held in commingled accounts. IP used these commingled 401(k) and pension plan assets, which were indivisible, in a securities lending program. Even though the 401(k) plans and the corporate pension plan had an indivisible interest in the loaned securities, IP allocated all $16 million to IP’s corporate pension plan until 2008, after the lawsuit was filed, when IP first allocated to the 401(k) Plans their pro-rata share of the securites lending income. The alleged damages were $6 million.
  5. Excessive Investment Management Fees. Rather than negotiating a reasonable fee arrangement with a single investment manager for each of the Plans’ core funds, IP utilized a multi-manager “fund of funds” structure, using as many as eight managers for one investment style, with each manager having a separate, high priced fee agreement for managing a portion of a fund. By dividing up the fund assets into small pieces given to numerous managers, IP diluted the ability of the Plans to obtain lower fees based on asset size, with no corresponding benefit. The alleged damages were $52 million.
  6. Delayed Contributions. IP improperly delayed crediting participant 401(k) contributions to their accounts, instead holding the contributions and keeping the accrued interest for its own benefit. This was allegedly done on purpose for the stated reason of saving IP over $1 million per year. The alleged damages were $6 million.
  7. Fraudulent Performance Reporting. Upon adding new “Smart Mix” and Core Fund investment options to the Plans on April 1, 2002, IP deceptively created, and provided in participant communications, “reconstructed” returns of those funds. IP presented one-year, three-year, five-year, and ten-year “annualized performance” figures for the funds, even though 11 of the 13 did not even exist for some of those periods. IP described the “reconstruction” method in such a convoluted and vague manner that not even the most knowledgable investment professional could understand. IP did not disclose that the returns they provided to participants to induce investment in the new funds were fabricated.

The Settlement

In settling a case such as this, the parties seek to have the case certified as a class action for purposes of the settlement. Here, the proposed settlement classes are defined as:

The Settlement Class. All participants in the International Paper Company Salaried Savings Plan or the International Paper Company Hourly Savings Plan, excluding the Defendants, whose Plan accounts had balances greater than $0 at any time between January 1, 1997 and May 31, 2008. The Class includes the Beneficiary of a deceased person who participated inthe Plan at any time during the Class Period, and/or, Alternate Payees, in the case of a person subject to a Qualified Domestic Relations Order who participated in the Plans at any time during the Class Period.

The Large Cap Stock Fund Sub-Class. All participants in the Plans, excluding the Defendants, whose accounts held units of the Large Cap Stock Fund (LCSF) from April 1, 2002, through May 24, 2011 (the “LCSF Sub-Class Period”), and whose LCSF units underperformed relative to the Russell 1000 Index. This sub-class also includes the Beneficiary of a deceased person who
participated in the Plan at any time during that period, and/or, Alternate Payees, in the case of a person subject to a Qualified
Domestic Relations Order who participated in the Plans at any time during that period.

The Company Stock Fund Sub-Class. All participants in the Plans, excluding the Defendants, whose accounts held units of the Company Stock Fund from April 14, 1998, through May 24, 2011 (the “CSF Sub-Class Period”) and whose units underperformed relative to the S&P 500 Index. This sub-class also includes the Beneficiary of a deceased person who participated in the Plans at any time during that period, and/or, Alternate Payees, in the case of a person subject to a Qualified Domestic Relations Order who
participated in the Plans at any time during that period.

According to the filed paperwork, IP agreed to the following affirmative relief for the next 4 years:

  1. IP will not prohibit employees from transferring their investments out of the Company Stock Fund;
  2. IP will not offer retail mutual funds;
  3. IP will not allow the Plans’ recordkeeper to be paid on a percentage of assets basis;
  4. IP will not profit from the Plans;
  5. IP will competitively bid the Plans’ recordkeeping services;
  6. IP will rebate to the Plans relationship discounts offered as a result of Plan investments;
  7. IP will provide the Plans with revenue earned from securities lending; and
  8. IP will introduce a passively managed (index) large cap stock option in the Plans’ core lineup.

Plaintiffs were represented by Schlichter, Bogard & Denton, which will seek to have $10 million in fees and $1.7 million in costs approved by the district court and taken from the gross settlement fund. This is the second recent settlement for the firm after CIGNA and Prudential agreed to pay $35 million to settlement excessive fees claims regarding CIGNA’s in-house 401(k) plan.

Cigna was represented by Morgan Lewis & Bockius, LLP and Donovan Rose Nester, PC.

Our Thoughts

It appears that one of my favorite ERISA thought leaders Stephen Rosenberg was correct back in 2009 when he predicted the Hecker v. Deere decision would be a “high water mark for the corporate bar in defending against [excessive fee] claims.” The pendulum clearly is swinging back in the direction of plan participants in light of the recent court decisions and settlements covered on this blog.

What does this mean for the average plan sponsor? On its face, not much as settlements have no precedential value. But the lessons to be learned here are important. Good fiduciary practice means reviewing a case like this and investigating whether any of the allegations are relevant to your own plan. At least one claim here, that IP failed to timely deposit contributions, is applicable to plan sponsors of all sizes. At minimum, the affirmative relief agreed to by IP is a very useful cheat sheet of issues that every fiduciary should look into.

If you already have a good fiduciary process, then make sure you’re documenting it. Prudence focuses on the process for making fiduciary decisions. Therefore, it is imperative to document decisions and the basis for those decisions. If you don’t have good fiduciary process in place, you need one. Find someone who can help you.