Compliance July 18, 2023

Verizon Settles 401(k) Complaint for $30M

The agreement is still pending court approval but would end 7-year court case.

Reported by

Verizon Communications Inc. has agreed to pay $30 million to settle a complaint from 2016 related to allegations of an underperforming hedge fund in its retirement plan target-date funds, according to a July 7 filing in the U.S. District Court for the Southern District of New York.

Class representative Melina Jacobs and Verizon agreed to the proposed settlement, pending court approval, over allegations of Verizon and its employee benefits committee failing to uphold its fiduciary duty in monitoring the performance of a hedge fund called the Global Opportunity Fund and not taking “corrective action regarding the Fund despite obvious and long-term underperformance.”

In the case, Jacobs et al. v. Verizon Communications Inc. et al., Verizon’s attorneys had argued that the company had been following its fiduciary duty in monitoring the target-date funds managed by investment firms Russell Investments and J.P. Morgan. Other allegations regarding underperforming target-date funds and a lack of disclosures related to participant fee statements were dismissed in multiple rulings. Fidelity was also removed as a defendant in the lawsuit because it had not been a plan fiduciary.

But U.S. District Judge Paul G. Gardephe had allowed the Global Opportunity Fund argument to continue, with a trial set to begin this month, according to the court filing. Instead, after two days of negotiations, the parties came to an agreement on the $30 million payment. One-third of the settlement will go to the law firms representing the class, with the remainder going to plan participants as tax-deferred contributions to their accounts or rollovers into individual retirement plan accounts.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

The plaintiffs were represented by law firms Glancy Prongay & Murray LLP, Schneider Wallace Cottrell Konecky LLP and Edgar Law Firm LLC. There are about 160,000 members in the class, according to the court filing.

Verizon did not immediately respond to a request for comment on the proposed settlement.

The plaintiffs’ attorneys wrote that, based on comparing the Global Opportunity Fund to an equity investment benchmark, the damages for the period between April 30, 2010, and January 31, 2017, would be between $102.6 and $231 million. They went on to say that the settlement amount, representing about 13% to 29.2% of those damages, “is appropriate, given the wide range of potential damage outcomes at trial—as well as the possibility of a verdict in favor of Defendant that would result in zero recovery for the Class.”

The Global Opportunity Fund, which had been included in part of the portfolio for target-date funds in the plan, used a strategy aiming to “add value, relative to its benchmark, by investing in the most attractive markets on a global basis, while simultaneously underweighting, or shorting, markets that are viewed by the fund managers as overvalued.”

The fund allegedly had a target rate of return of 12%, which “was subsequently lowered at least twice,” according to the filing. The plaintiff alleged that between 2007 and 2016, the fund “severely underperformed,” as its annualized net performance ranged from -10.32% to 13.88%, with negative returns in three years, ending with an earned aggregate of 1.4% at the end of 2016.
Compliance July 17, 2023

SEC’s Gensler Says AI Can Create Conflicts of Interest

The SEC chair said that an AI program that even accounts for the interests of the adviser could present conflicts of interest.

Reported by

Gary Gensler, the chair of the Securities and Exchange Commission, described artificial intelligence and machine learning as the “most transformative technology of our time” at a speech hosted by the National Press Club in Washington on Monday.

Gensler’s focus regarding AI was, and has been for some time, on its influence on financial advice. AI has been used in sentiment analysis and predictive analytics. But Gensler said AI can create or aggravate conflicts of interest, depending on how the AI is programmed and what data it is trained to consider. He noted that if an adviser uses AI optimized in such a way that places an adviser’s interest ahead of the client’s, even on a highly conditional basis, then that could represent a serious conflict of interest.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

Gensler went further and said that if AI software even “takes into consideration the interest of an adviser, this introduces conflict.”

The potential for conflicts stems from a number of factors. For one, AI models can be opaque and difficult for the investing public to understand, making it more difficult for investors and regulators to recognize a conflict. The outcomes of predictive analytics “might reflect old biases” if they rely on dated data or reinforce “prejudice for protected characteristics.”

Gensler remarked, as he has previously, that he has directed the SEC staff to develop recommendations for rule proposals related to these concerns.

The chairman also touched on cryptocurrency and climate disclosure during a question-and-answer period following the speech.

In response to a question he is frequently asked—Why rely on enforcement instead of new rules for crypto?—Gensler responded that existing laws cover crypto already, and no new ones are needed. He added that the crypto industry is “rife with fraud and abuse,” and the “rules are on the books already.”

He compared his enforcement-first approach to fighting insider trading. No new rule-makings are necessary, violations should be dealt with through enforcement, and crypto is the same, he explained. He said the SEC is “speaking to the market through enforcement actions.”

On climate disclosure, Gensler was asked about opposition to Scope 3 greenhouse gas emissions disclosure that has come from Congressional Democrats in agricultural districts, such as Representative David Scott, D-Georgia. Scope 3 disclosure requires issuers with an environmental or emissions goal or mission to disclose emissions in their value chain, or a reasonable estimate thereof, which has been sharply opposed by agricultural interests on the grounds that it would be prohibitively costly for farmers to implement.

Gensler answered that more than half of issuers already make climate risk disclosures, and a significant minority also disclose emissions. Perhaps more importantly, this proposal received high investor demand and positive feedback and is done to “bring consistency and comparability” to these disclosures.

«