Compliance October 14, 2024

Northern Trust Reaches Tentative Settlement in 401(k) Suit

Settlement to be considered by the court on October 30 in class action filed by workers in 2021.

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Northern Trust Co. has reached a tentative settlement in a class action lawsuit challenging in part the use of in-house target date funds in its company benefit plan.

A settlement would end a dispute dating back to 2021 when six participants in the Northern Trust Company Thrift-Incentive Plan alleged in part that the company’s plan committee failed to prudently select and monitor investment options both for performance and fees. Specifically, plaintiffs called out the defendants’ decision to retain 11 Northern Trust Focus Funds, a TDF suite from the firm’s asset management division.

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The terms of the settlement will be considered in an “off-the-record” call on October 30 with Judge Keri L. Holleb Hotaling of the U.S. District Court for the Northern District of Illinois, according to a court filing Thursday. The agreement will require court approval.

Plaintiffs in the case, Conlon et al v. The Northern Trust Company et al., are represented by lead attorneys with The Law Offices of Michael M. Mulder and Scott+Scott Attorneys at Law LLP; lead attorneys for Northern Trust are with Willkie Farr & Gallagher LLP.

In March 2022, Northern Trust had sought to get the case dismissed for failure by the plaintiffs to cite a reasonable claim that the committee breached fiduciary duties. The defendants argued that the plan committee had followed correct procedures, and that the Employee Retirement Income Security Act does not mandate what kind of benefits employers must provide, so long as they follow proper and prudent processes.

In August 2022, Judge Charles Ronald Norgle denied the appeal, siding with the defendants and moving the case to discovery.

In that opinion, Norgle ruled that plaintiffs had made enough of a case that the plan committee had not sought the best investment options nor negotiated enough for the lowest fees—both acts that may have hindered participant saving outcomes. Norgle pointed, in part, to allegations in the compliant that the Northern Trust Focus Funds had been the only TDF investing option in the plan and were being used as the default investment—even though the funds had underperformed relative to benchmark indices and comparable TDFs for three years.

“After being included in the Plan, the Focus Funds continued to underperform and generated unreasonable fees, so their retention shows that Defendants followed no prudent management process,” he wrote.

Norgle went on to cite the 2014 Supreme Court decision in Fifth Third Bancorp v. Dudenhoeffer that acknowledges the various “circumstances facing an ERISA fiduciary” and says that a court must “give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.”

He then, however, went on to cite the Supreme Court’s 2022 ruling in Hughes vs. Northwestern University, in which the court rejected a “categorical rule that would bar breach of fiduciary duty claims” if defendants can provide an adequate roster of competing investment choices. In citing that rule, Norgle pointed to the line that if “the fiduciaries fail to remove an imprudent investment from the plan within a reasonable time, they breach their duty.”

The Northern Trust Company Thrift-Incentive Plan held $2.9 billion in assets as of the end of 2023, according to a Form 5500 filing.

Neither Northern Trust nor plaintiffs’ attorneys responded to request for comment regarding terms of the settlement.

In September, Salesforce Inc. settled a pair of 401(k) lawsuits alleging excessive retirement plan fees—including allegations of not swapping out lower-cost and underperforming investment options—for $1.35 million. Those complaints, both by participants, were focused on the company’s $5 billion 401(k) plan.

Data & Research October 14, 2024

September Shows Slight Decline in Funding Status for Most DB Plans

The majority of pension consultancies report liabilities edged out strong market results.

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U.S. corporate pension funding ratios dipped slightly in September, as falling yields drove liabilities higher than could be offset by strong gains in equities, according to most of the country’s largest plan consultants.

The consensus of slight declines in pension funding status comes after a month in which the Federal Reserve cut interest rates for the first time since the COVID-19 pandemic and its campaign of hikes to combat inflation, which began in 2022. Pension liabilities, driven in part by market interest rates, rose 2% to 3% last month and are up for the year 3% to 5% through September, according to consultancy October Three.

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Some of that liability pressure was offset by stock gains, according to the firm, which were up in September due mostly to large-cap U.S. stocks, particularly tech stocks. In total, however, the two model pension funding plans October Three tracks dropped by slightly less than 1% at month’s end.

Those declines do not offset a strong year for pension funding status, says Brian Donohue, a partner in the firm, and while short-term rates are likely to trend down, long-term rates are the more important area for defined benefit plans, he says.

“It’s that long end of the curve that is more meaningful,” Donohue says, noting that those rates rose relatively quickly in recent years, from about 3% to 5%, when the Federal Reserve rapidly hiked short-term rates to offset inflation.

While long-term rates should start declining in coming months, Donohue doesn’t see it going back to that 3% rate in part because he sees inflation being a bit sticky. 

“Long-term rates may move lower, but I don’t see anything like the 3% or 3.5% some may be expecting,” he says.

The higher rates, mixed with relatively strong markets, have October Three’s Plan A model up 7% on the year despite dips; that plan is a traditional plan with a 60/40 asset allocation. Its Plan B, meanwhile, is up more than 1%; that model is a largely retired plan with a 20/80 allocation, with a greater emphasis on corporate and long-duration bonds.

Plan A

108.8%

108.4%

108.4%

Plan B

107.5%

106.0%

106.7%

106.9%

105.3%

101.9%

101.8%

100.7%

101.7%

101.6%

101.5%

101.4%

101.2%

101.2%

100.0%

Jan 31

Feb 31

Mar 31

Apr 31

May 31

Jun 31

Jul 31

Aug 31

Sep 31

Source: October Three Consulting

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Mercer, a business of Marsh McLennan, also reported a pension funding decline in September. The firm’s estimated aggregate funding level of pension plans fell 1 percentage point in September to 107%. Marsh attributed that drop to a decrease in discount rates, though the fall was partially offset by growth in equities.

“While long-term bond markets had already priced in much of the Fed’s September interest rate cut, we did see a slight decline in pension discount rates,” Matt McDaniel, a partner in Mercer’s wealth practice, said in a statement with the report. “Meanwhile, the bull run for equity markets continues and set new all-time highs yet again in the month.”

He also noted that while future Fed rate cuts may not directly lower pension discount rates, the uncertainty of both the timing and the extent of future rate cuts will cause funded status volatility. In recent weeks, a robust jobs report and a stronger-than-expected consumer price index number had market watchers pondering a more aggressive rate-cutting stance by the Fed.

“Many sponsors have built up surpluses within their plans and should be considering what de-risking methods make the most sense for their particular situation,” McDaniel said.

Benefits consultancy Milliman’s Pension Funding Index, which tracks the largest 100 U.S. corporate pension plans, also reported a slight decline in September to 102.4% at month-end from 102.6% at the end of August. Here again, plan assets increased due to a 1.74% average investment gain, but the discount rate declined by 0.14% to 4.96%, creating liabilities that “eclipsed” asset growth, “leading to a $12 billion loss in funded surplus,” according to its report.

MetLife Investment Management reported a funded status decrease for all of the third quarter. For September, the asset management business of MetLife Inc. estimated that funding status dropped to 104.0%, down 1.6 percentage points from the end of Q2.

“Pension liabilities increased due to falling interest rates,” the firm wrote in its report. “Discount rates fell by 50 basis points with a decrease of 55 basis points in interest rates and spread tightening of five basis points. Changes in the discount yield curve accounted for 10 basis points of widening.”

MetLife also noted that, over the past 10 years, pension funded status dropped to its lowest level on June 27, 2016, at 74.7%, and peaked on May 28, 2024 at 106.3%.

Bright Spots

Two pension consultancies did find slightly rosier results.

Agilis, in its U.S. Pension Briefing, noted that the Fed’s first interest rate cut since the COVID-19 pandemic led to falling yields, particularly for shorter-duration bonds, and contributed to an increase in pension liabilities of between 1 and 2  percentage points.

However, the firm concluded that “the strong investment returns across nearly all sectors helped offset these increases.” That environment, according to Agilis, led to pension plan sponsors likely seeing “slight improvement to their funded status, contingent on their asset allocation and initial funding levels.”

Fund tracking from Aon and Wilshire, which both consider defined benefit plans from companies in the S&P 500 Index, reported slight improvement in funding status. Aon found an increase of just 0.1 percentage point, boosting its measure to 100.8% from 100.7%; Wilshire, meanwhile, reported a somewhat more improved status. That firm found a 0.3-percentage-point boost to 101.6% from 101.3%.

Whatever October brings, prognosticators are forecasting more pension funds will be offloading their liabilities into 2025. In plan sponsor polling released this week, MetLife found that 93% of companies with de-risking goals plan to completely divest their defined benefit pension plan liabilities, up from 89% in last year’s poll.

Donohue of October Three says that, as interest rates are slated to keep coming down, owning bonds is becoming more attractive again, even as funding ratios begin to dip. That, in turn, means further impetus for some firms to consider pension risk transfers to offload some or all pension obligations.

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