Compliance March 27, 2009

Merck Loses Challenge to Company Stock Fiduciary Claims

The U.S. District Court for the District of New Jersey has refused to issue summary judgment for Merck&Co. on claims the drugmaker breached its fiduciary duties by continuing to offer company stock as an investment option in its retirement plans.
Reported by

In his opinion, U.S. District Judge Stanley R. Chesler said the facts alleged by retirement plan participants overcome the presumption of prudence allowed for plans that must invest in employer stock according to plan terms, and permit a finding that the fiduciaries abused their discretion by continuing to invest in company stock.

Chesler pointed to a previous ruling that determined a “plaintiff must show that the ERISA fiduciary could not have believed reasonably that continued adherence to the ESOP’s direction was in keeping with the settlor’s expectations of how a prudent trustee would operate.” To meet this standard on the pleadings, Chesler said the facts alleged must depict the kind of “dire situation’ at the subject company which would require plan fiduciaries to disobey plan terms to invest in company stock so that they might satisfy their prudent investment obligation to plan participants.

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Facts that could indicate that plan fiduciaries abused their discretion by continuing to invest in company stock include, as in the prior case, a “precipitous decline in the price of [the employer’s] stock,’ together with allegations that plan fiduciaries knew of the stock’s “impending collapse.’ Chesler said a company did not have to be on the brink of bankruptcy in order for fiduciaries to go against the terms of the plan.

According to the opinion, Merck stock plunged 27% on September 30, 2004, the day Merck withdrew its “blockbuster’ arthritis drug Vioxx from the market. The stock continued to fall, and by November 2004, the stock had fallen about 13% more. Vioxx was the biggest drug, measured by sales, ever withdrawn from the market at that time, and the stock plunge erased about $26.8 billion in market value for Merck.

Chesler said these facts, taken as true, demonstrate a “crisis situation’ faced by Merck as a result of Vioxx’s failure and an ongoing internal discussion at Merck, combined with attention from the FDA and mounting data, which could reasonably support a conclusion that the fiduciaries knew about the potential for a significant loss of value in Merck stock should the company’s safety concerns with Vioxx materialize into an adverse financial event related to the marketability of Vioxx.

Chesler also declined to dismiss the employees’ claim that the Merck defendants breached their ERISA duties by withholding the truth about Vioxx’s risks. He rejected Merck’s argument that this claim could not go forward because the employees did not plead “loss causation and damages.’

The court said: “An ERISA communications claim which involves allegedly deliberate efforts to mislead investors is not subject to the same lack of loss causation defect inherent in a pure non-disclosure claim,’ and found that the defendants allegedly made affirmative misrepresentations about the safety profile of Vioxx with the intent of keeping the sales high, which in turn overstated the strength of Merck and increased its market value.

The case is In re Merck & Co. Securities, Derivative & “ERISA’ Litigation, D.N.J., No. MDL 1658 (SRC).

In Practice March 27, 2009

How to Retain, Grow Your Book of Business in Today’s Market

The economic climate might make client retention more difficult—but there’s also opportunity for retirement plan advisers.
Reported by

Clients might be more skeptical than ever about financial services firms, in light of market conditions and financial scandals, but this is also a good time for many advisers to show their worth. “There’s never been such a big breakdown of trust in the financial services industry,” Mark Palmer, director of Business Consulting at Charles Schwab, told PLANADVISER.com. “People are reaching out to find trusted advisers more than ever.” Registered investment advisers (RIAs) are particularly positioned to capture that trust, he added.

Communication is the key to keeping clients right now, Palmer said. That still means doing one-one-one meetings and conducting seminars, but it also has taken on a more “multi-prong approach,” he said. Advisers are incorporating more technology into their messages, such as sending out eNewsletters and conducting Webcasts.

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Yet the dilemma remains: Client demands are up and revenues are down for many advisers who rely on asset-based fees, Palmer said. How do advisers maintain expenses while servicing client demands? Palmer suggested advisers look for ways to increase productivity through technology and workflow to free themselves up for more client-facing.

He also noted that, in the last three to five years, many advisers have been more prepared, for example, by setting themselves up to be relationship-based rather than performance-based. Those advisers are already prepared for this market. Firms that held narrow value propositions could be weeded out in the market, he added. “The right time to focus on these issues is before you need to….but now’s the time you have to do it,” he said.

Karen Betts, vice president of Marketing for AUL Retirement Services, said the market has forced advisers to become more holistic. She also said advisers who see retirement as not a compartmentalized event but a “retirement planning story”—more of a continuum from accumulation to retirement—are set up to do well. “It’s not just accumulation; it’s accumulation through distribution,” she said.

Where to Find New Plans

Growing your business might be a real possibility for some advisers, depending on where they are with their business goals and how they can juggle retention with growth. As the demand for client hand-holding goes up, the opportunity to pursue new clients can be more difficult. Some firms are more focused with retention right now, and others can both retain and grow clients, Palmer said.

Chris Augelli, vice president, Alliance Programs & Business Development for ADP Retirement Services, said now is the time to “be more proactive than ever before.” Differentiating yourself from the competition as an adviser who specializes in retirement plans goes a long way, he said. Augelli recommended approaching the plan sponsor with a statement of service that distinctly lays out the adviser’s service, such as your investment policy model, how often you do meetings, and what your participation goals are.

Another benefit retirement-focused advisers might have is the opportunity of partnering with other financial advisers, Augelli said. For instance, advisers who only dabble in retirement plans might be looking for an adviser that is more of a specialist to add a specific benefit to their plans.

Augelli also mentioned the importance of partnering with providers to retain and build your book of business. Payroll providers that are also recordkeepers, like ADP and Paychex, are continuing to be partners advisers use to capture more retirement plan clients.

For 401(k)-centric advisers, another area to look for clients might be in the 403(b) arena. Betts encourages advisers who specialize in retirement plans to expand into the non-profit market. The increased regulation in the 403(b) space presents a demand from sponsors “for advisers to help them understand what these new regulations mean.”

First and foremost, “you’ve got to make sure your current client base is intact,” Palmer said. The best way to build happens to be through retention, which turns into referrals. “It really is one in the same,” he added.


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