A new Field Assistance Bulletin (FAB) from the Department of
Labor (DOL) provides guidance about compliance by plan administrators of
single-employer defined benefit (DB) plans with the annual funding notice
requirements of section 101(f) of the Employee Retirement Income Security Act
of 1974 (ERISA), as amended by section 2003 of the Highway and Transportation
Funding Act of 2014 (HATFA).
HATFA extends relief provided in the
Moving Ahead for Progress in the 21st Century Act (MAP-21)—passed in 2012—which
allowed defined benefit plans to discount future benefit payments to a present
value using a 25-year average of bond rates rather than a two-year average.
MAP-21 created a “corridor” of rates on either side of a 25-year average that
were permissible for discounting purposes. If the two-year average falls
outside this corridor, a company can use the 25-year average that is closest to
the two-year average in the corridor. HATFA resets the corridor’s boundaries.
FAB 2015-01 describes the
adjustment of the segment rates under HATFA. It also includes a model annual
funding notice and a Q&A about the new rules.
Pending further guidance, the agency said it will treat a
plan administrator of a single-employer DB plan as satisfying HATFA if the plan
administrator complies with the guidance in FAB 2013-01 and the current FAB and
has acted in accordance with a good faith, reasonable interpretation of rules
not specifically addressed in those pieces of guidance. The DOL also said it
will treat a funding notice for a plan year beginning after December 31, 2012,
that was issued before the issuance FAB 2015-01 as satisfying the HATFA rules
if it reflects a good faith, reasonable interpretation.
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A
PIMCO Total Return Fund investor lawsuit calls into question compensation paid
to former co-chief investment officers and co-chief executive officers Mohamed
El-Erian and Bill Gross.
Investor Robert Kenny is suing Pacific Investment Management
Company LLC (PIMCO) and PIMCO Investments LLC, alleging the company received
excessive compensation that had no relationship to the services rendered.
The lawsuit claims the excessive compensation
received by the investment company through the PIMCO Total Return Fund, Kenny
and the other fund shareholders is so disproportionately large that it could
not have been the product of arm’s-length negotiations.
Kenny seeks to rescind the investment advisory agreements,
the supervisory and administration agreements, and the distribution and
servicing agreements the fund has entered into with PIMCO, and to recover the
amounts charged by PIMCO or, alternatively, recover any improper compensation
retained by PIMCO in an alleged breach of its fiduciary duty under Section
36(b) of the Investment Company Act of 1940 (ICA). The complaint states that
because the excessive compensation is continuing in nature, Kenny seeks
recovery for a period commencing at the earliest date in light of any
applicable statute of limitations through the date of final judgment after
trial.
The lawsuit calls into question compensation paid to former
co-chief investment officers and co-chief executive officers Mohamed El-Erian
and William H. Gross. Gross is PIMCO’s founder and started the PIMCO Total Return Fund in May 1987.
The complaint notes that the fund was until recently the
largest mutual fund in the world. At the close of the fiscal year 2013 (i.e.
March 31, 2014), the PIMCO Total Return Fund held more than $230 billion in
assets under management.
However,
according to the complaint, as the increase in assets in the fund led to larger
and larger amounts of compensation being paid to the PIMCO, the fund’s
performance suffered. In 2012, the fund failed to outperform its benchmark, and
60% of the fund’s peers outperformed the fund. In 2013, the fund lost 1.92% and
trailed 70% of its peers in its worst performance since 1994. In calendar year
2013, for example, shareholders in Class A of the Fund saw returns of -5.97%
before taxes, while shareholders of Class B shares saw returns of -6.36% before
taxes.
The complaint argues that the fund’s poor performance has
shaken up management at PIMCO. In early 2014, El-Erian announced his
departure after purportedly butting heads with Gross over management
of the fund. In a move that shocked investors, Gross also left the firm in
September 2014, leaving to join competitor Janus Capital Group. News of both
El-Erian’s and Gross’s departures compounded the poor results of the fund and
led to billions of dollars in redemptions, the complaint notes.
As of September 2014, the fund had seen outflows of investors for 16 months,
totaling more than $60 billion in redemptions.
The lawsuit alleges that despite this poor performance, the
compensation PIMCO has received for its work for the fund and fund complex has
remained excessive and has led to extraordinary payments to its executives.
Last year alone, PIMCO paid more than $1.5 billion in bonuses and compensation
to Gross and El-Erian. According to the complaint, PIMCO claims that the
compensation it pays “is designed to pay competitive compensation and reward
performance, integrity and teamwork consistent with the firm’s mission
statement,” but no other executive officer of a peer publicly-traded financial
company came close to either of these bonuses on an individual level. It notes
that one must aggregate the compensation of the CEOs of 20 publicly-held peer
finance companies to come close to the amount of money Gross took home last
year.
The lawsuit cites hearings before the Subcommittee on
Commerce and Finance of the U.S. House Committee on Interstate and Foreign
Commerce, in which one participant said the essence of a claim for unfair fees
is “whether or not under all the circumstances the transaction carries the
earmarks of an arm’s length bargain.” The participant also noted that a breach
of fiduciary duty occurs “when a fiduciary permits an unreasonable or excessive
fee to be levied on the fund,” or “when compensation to the adviser for his
services is excessive, in view of the services rendered—where the fund pays
what is an unfair fee under the circumstances.”
The complaint charts the fees charged by PIMCO for both
institutional and retail class shares. It says for the fiscal year 2013, PIMCO
received $641,047,097 in investment adviser fees and $608,321,040 in
supervisory and administrative fees from the PIMCO Total Return Fund, for a
total received of more than $1.2 billion. The complaint alleges various
analysts criticized these fees, including one who said: “Pimco’s expense ratios
for Total Return are no better than average, which seems ridiculous for a fund
so large, and its prospects are worse.”
The lawsuit accuses PIMCO of raising fees over the years and
not using the fund’s economy of scale to lower fees. The complaint explains
that economies of scale are created when (as with the Total Return Fund) assets
under management increase more quickly than the cost of advising and managing
those assets. It notes that the work required to operate a mutual fund does not
increase proportionately with the assets under management.
In a statement to PLANADVISER, PIMCO said, "PIMCO believes this lawsuit is without merit and
intends to vigorously defend itself."