Compliance February 24, 2022

Coca-Cola Consolidated Settles ERISA Fiduciary Lawsuit for $3.5M

The settlement includes both monetary and nonmonetary aspects.

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Coca-Cola Consolidated has agreed to settle an Employee Retirement Income Security Act lawsuit filed against the company and its board of directors in the U.S. District Court for the Western District of North Carolina.

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The settlement includes a monetary payment of $3.5 million to the class of plaintiffs, who are participants or beneficiaries of the company’s defined contribution retirement plan.

In April 2021, a federal judge moved forward the lawsuit against Coca-Cola Consolidated, its board of directors and its benefits committee. The underlying complaint alleges that the defendant breached its fiduciary responsibilities by mismanaging the plan’s investment lineup.

The lawsuit specifically challenges the fact that the plan used the actively managed Fidelity Freedom Funds target-date fund suite rather than the index suite. The plaintiffs say the active suite is too “high risk” to be suitable for the plan’s participants. They said it has higher fees than the index suite, and other plan fiduciaries and investors lost faith in the active suite. The plaintiffs lodged similar allegations with respect to the Carillon Eagle Small Cap Growth Fund Class R5 and the T. Rowe Price Mid-Cap Value Fund. They also allege the recordkeeping and administrative costs of the plan were excessive.

According to a motion filed by the plaintiffs in favor of the proposed settlement agreement, the parties in the case have engaged in significant discovery efforts, including the exchange of discovery requests and the production of more than 30,000 pages of documents related to plan administration and the defendants’ alleged conduct. The defendants have taken plaintiffs’ depositions, and the plaintiffs have taken depositions of numerous fact witnesses and sought discovery from third parties. In addition, the parties exchanged expert reports related to issues of liability and damages.

Following mediation sessions, the parties reached an agreement in principle to resolve the action on January 18, 2022, and they have since worked to document the details in a formal settlement agreement. The settlement provides that, in exchange for dismissal of the action and a release of all claims, the defendants will make payment in an aggregate amount of $3.5 million into a qualified settlement fund to be allocated to participants, former participants, beneficiaries and alternate payees of the plan.

According to case documents, the settlement also includes “meaningful non-monetary relief related to the ongoing management and administration of the plan,” though the specific details of this non-monetary relief are yet to be published by the court. In similar settlements, such elements have included agreements to retain an independent fiduciary to oversee a plan’s investment menu and agreements to periodically utilize a request for proposal process to benchmark administrative services and their commensurate fees.

Data & Research February 24, 2022

As Participants Shun Annuities, Some Are Depleting Savings Quickly

Research suggests making participants more comfortable with annuitizing their savings could help them with spending in retirement.

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Asked what they will do with the money in their employer-sponsored retirement account when they retire, nearly one-quarter (23%) of participants surveyed by AllianceBernstein said they would rollover their funds to an individual retirement account, while 18% said they would leave their money in the plan. Five percent indicated they would take a lump-sum distribution.

Only 11% reported they would buy an annuity, even though one-third selected a “steady stream of income in retirement” as the quality most important about saving for retirement, according to AllianceBernstein’s “Inside the Minds of Plan Participants” report.

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AllianceBernstein asked what  makes retirement plan participants shun annuities and were told that participants are concerned about inflation eroding the purchasing power of their income stream (32%), giving up control of their assets and not having access to them in case of emergency (21%), and not receiving all the income benefit they paid for if they die (18%). When given a choice between two hypothetical scenarios, two-thirds of participants surveyed said they would select $40,000 in guaranteed annual income if their money would grow with the stock market, and they could access their funds over a $50,000 guaranteed annual income without these features.

Tim Walsh, senior managing director at TIAA, has previously said there is more flexibility with in-plan annuities than plan sponsors or participants think. “In-plan annuities are really hybrid annuities. They act like mutual funds during the savings years, but when a participant retires, he has the option to annuitize; it’s not mandated to annuitize,” he said. “When participants get to retirement, their plans for retirement may have changed, so flexibility is important.”

Walsh also pointed out that 403(b) plan participants—who more likely have in-plan annuity options than 401(k) plan participants—typically only annuitize part of their benefits. This addresses the argument that participants don’t want to lock up all their assets. 403(b) plan participants invest in annuities, but they can decide whether to annuitize their savings or not at retirement. “A diversified income strategy that includes partial annuitization, systematic withdrawals and Social Security benefits is the best combination for meeting daily expenses, emergency expenses and leaving a legacy in retirement,” Walsh said.

According to the latest edition of MetLife’s “Paycheck or Pot of Gold Study,” nine in 10 pre-retirees feel it is valuable (i.e., very important or absolutely essential) for someone to have a guaranteed monthly income in retirement to pay their bills. Nine in 10 pre-retirees (89%) also say they are interested in an option that would allow them to have both a monthly retirement “paycheck” that would last as long as they (or their spouse/partner) live and access to a lump sum of their retirement savings to spend however they want. However, if they had to choose, pre-retirees are far more likely to opt for the annuity (monthly retirement “paycheck”) (82%) over a lump sum that would give them all their retirement savings at one time but could potentially run out (18%).

How Annuities Help With Retirement Spending

AllianceBernstein also found people misjudge the pace at which they can draw down their assets in retirement. Nearly half (48%) said they think if they had a $500,000 account balance, they could withdraw 7% or more each year and not run out of money in their lifetime. Another 28% said they could withdraw from 4% to 6% each year.

A 4% withdrawal rate with annual inflation adjustments has been considered a safe withdrawal rate for years. It became the standard when financial planner Bill Bengen first demonstrated in 1994 that the 4% withdrawal rule had succeeded over most 30-year periods in modern market history. However, recent research from Morningstar finds that a 3.3% starting withdrawal rate is more sustainable given today’s low bond yields and high stock valuations.

Meanwhile, MetLife’s 2022 “Paycheck or Pot of Gold Study” found that today, one in three retirees (34%) who took a lump sum from their defined contribution plan depleted the lump sum in five years, on average. This is more than in the inaugural study in 2017, which found that 20% of retirees who took a lump sum from a retirement plan depleted their lump sum, on average, in 5.5 years.

“There can be significant drawbacks for retirees when taking a lump sum,” says Melissa Moore, senior vice president and head of annuities at MetLife. “With the average American living 20 years or more in retirement, longer than previous generations, this can leave them at risk of depleting their money too quickly and needing to fund a significant portion of their retirement years with no income other than Social Security.”

For those who selected a lump sum at retirement, more than three-quarters (79%) made at least one major purchase, including luxury items such as vehicles, vacations, and new or second homes, within the first year of withdrawing money. This is a significant increase from 2017, when 64% made such a purchase. Among all lump sum recipients, 46% express at least some regret about withdrawing money from their DC plan.

In comparison, nearly all annuity-only retirees (97%) use their DC plan money for some type of ongoing expense, such as day-to-day living expenses or housing expenses, and 94% agree that receiving annuity payments makes it easier for them to pay for basic necessities. With that, 95% say that receiving monthly annuity payments makes them feel financially secure. In fact, virtually all annuity-only recipients are happy (96%) that they chose to receive a retirement paycheck from their DC plan.

A majority of retirees (80%) and pre-retirees (74%) report having received some form of information about what to do with the balance of their DC plan when they retire. Most retirees indicate they feel the amount of information they had available to them at the point of retirement was just right (77%)—especially those who have an annuity only (i.e., not an annuity/lump sum hybrid option) (87%, compared with 63% of lump-sum retirees).

Pre-retirees generally see the amount of information they’ve received so far as “just the right amount” for what they need (69%). However, more than one in five say it’s been too little (21%)).

Both retirees and pre-retirees (89% and 94%) think it would have been/would be helpful if plan sponsors were required to provide an annual lifetime income statement showing employees how much monthly income they can expect their DC plan account balance to provide in retirement.

Participants will get their wish this year, as the Setting Every Community Up for Retirement Enhancement (SECURE) Act, and subsequent Department of Labor regulations, require plan sponsors to begin doing so. Participants will need education and help to understand the projections and how to use them in retirement planning.

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