Compliance July 9, 2019

Dow, DuPont and Corteva Sued for Allegedly Ducking Pension Obligations

According to plaintiffs in a new ERISA lawsuit, the pension plan in question was underfunded by nearly $6 billion dollars when its assets and liabilities were transferred to a spinoff company.

Reported by

A new Employee Retirement Income Security Act (ERISA) lawsuit filed in the U.S. District Court for the Northern District of California calls into question actions taken by pension plan fiduciaries during and after the 2017 merger of Dow Chemical Co. and E.I. du Pont de Nemours and Co.

As noted in the complaint, with this merger, the combined entity, known as DowDuPont, became the largest chemical conglomerate in the world. According to the plaintiff, the two historical companies had intended and planned from the beginning to separate into three wholly independent companies and move the DuPont Pension and Retirement Plan to one of the newly formed companies, known as Corteva Agriscience.

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

“Barely a year later, more details on the plan were finally released when, on November 1, 2018, Ed Breen, CEO of DowDuPont, announced that the pension plan, along with Historical DuPont, were moving to a company with the trade name Corteva Agriscience, a spinoff purely focused on agriculture,” the complaint says. “The existence of Historical DuPont, the plan’s sponsor for more than a century and the company for whom the plan participants worked, would be mostly nominal, as all of the assets and business lines of that company other than its agricultural businesses would stay with the New DuPont or the New Dow, while all of its pension liabilities, along with tremendous litigation liabilities, would transfer.”

To be clear, after the 2017 combination of the companies and the creation of Corteva, the leadership announced plans to again separate Dow and DuPont. According to the complaint, retirees were told by Breen to take comfort in the fact that Corteva was going to be highly rated and that a recent contribution of $1.1 billion had been made to top up the plan, which, at the time, was still short of being fully funded by several billion dollars.

“In fact, the shortfall was more than $3.2 billion at the end of 2018 when using the artificially inflated interest rates amended into ERISA by MAP-21 and more than $5.9 billion at the end of 2018 using unadjusted, traditional ERISA rates,” the complaint states.

The complaint suggests that the use of artificially high interest rates to calculate statutory segment rates decreases the funding shortfall that a plan is required to disclose to participants annually. At the same time, these inflated interest rates decrease the minimum amount a plan sponsor is required to contribute each year, the complaint alleges.

“Understated liabilities and reduced contributions are a double whammy. Not only are the plan’s liabilities understated, but, because liabilities are directly linked with funding requirements, less cash is being invested to cover future benefits,” the complaint states. “Should Corteva suffer any downturns in its business, retirees are at risk. More importantly, Historical DuPont, the steward of the plan since its formal adoption on September 1, 1904, is no longer a functioning business capable of meeting its funding obligations under the plan. Instead, it is a wholly owned subsidiary of Corteva, to whom the plan participants must now turn for their promised benefits.”

Seeking class-action status, the lead plaintiff suggests that plan fiduciaries “are kicking the plan down the road along with the retirees that built the historical company.”

“The new companies, by leaving Historical DuPont as the plan sponsor and moving that company, after having eviscerated the plan sponsor’s business operations, to Corteva, have removed themselves from the controlled group of the plan,” the complaint states. “In summary, were Corteva to fail and file for bankruptcy, the plan can be terminated through a distress proceeding without affecting the other companies. If the other companies had not removed the plan from their controlled group, the plan could not be terminated through a bankruptcy filing unless all members of the controlled group also filed for bankruptcy.”

The plaintiff says these actions were taken in violation of ERISA and in violation of the fiduciary duties owed to retirees.

“Dow, DuPont, plan sponsor and certain individual officers and directors have, among other violations, acted disloyally and engaged in prohibited transactions by putting their own financial interests in front of retiree earned benefits,” the compliant states. ”These individuals and entities are motivated by self-interest and have fatal conflicts of interest that prevent them from making appropriate impartial decisions about the future of more than 120,000 retirees and their families.”

The complaint seeks permanent injunctive relief, declaratory planwide relief, make-whole relief for alleged losses, and disgorgement of ill-gotten profits against the defendants. Apart from the alleged fiduciary breaches and prohibited transactions detailed in the lengthy complaint, the allegations also include that plan officials have repeatedly violated plan documents.

“The plan documents do not contemplate, nor do they authorize, the evisceration of the business activities of Historical DuPont and the shift of the plan sponsor, along with the plan assets and liabilities, to a newly created company and controlled group,” the complaint argues. “By removing Historical DuPont’s business activities, leaving it a shell corporation, Historical DuPont is no longer able to make the contributions that the plan documents require be made by the plan sponsor, Historical Dupont. Both actions are violations of the plan documents.”

The DuPont Corporate Communications team shared the following statement concerning the lawsuit: “On Wednesday, July 3rd, a class action lawsuit was filed in U.S. District Court in the Northern District of California involving the Pension and Retirement Plan.  The plaintiffs in the purported class are alleging that the fiduciaries of the Pension and Retirement Plan violated the Employee Retirement Income Security Act of 1974, as amended, when they directed that E.I. du Pont de Nemours and Company (the Pension and Retirement Plan sponsor), along with the Pension and Retirement Plan itself, would be included in the assets that were recently spun off with Corteva, Inc. We believe that the allegations in the complaint are without merit, we have strong defenses and we intend to defend the allegations vigorously.”

The full text of the complaint is available here.

Deals & People July 8, 2019

Wells Fargo and Principal Can Learn From John Hancock-New York Life Deal

The recently finalized acquisition of Wells Fargo’s Retirement and Trust business by Principal Financial Group calls to mind an earlier deal, inked by John Hancock and New York Life.

Reported by

Looking back over the first half of 2019, Patrick Murphy, CEO of John Hancock Retirement Plan Services, says it’s already been an interesting year for the retirement plan industry.

One of the big stories, he agrees, was the announcement and recent finalization of the acquisition of Wells Fargo’s Retirement and Trust business by Principal Financial Group. Through the acquisition, Principal effectively doubled the size of its U.S. retirement business, while bringing on institutional trust and custody offerings for the non-retirement market and expanding its discretionary asset management footprint.

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

Murphy says he was not surprised to see such a deal come down the pike, given the ongoing discussions of recordkeeper industry consolidation. As PLANSPONSOR data show, the trend of recordkeeper consolidation has been going on since at least 2009. In fact, out of the top 20 recordkeepers by assets analyzed in 2009 and again in 2017, only four had not pursued an acquisition-based growth strategy.

“There has naturally been a lot of industry talk and introspection coming out of the deal between Principal and Wells Fargo,” Murphy says. “So far, what is clear to me is that they are taking a calculated and careful approach to integrating the two companies, and I think that’s wise.”

Murphy speaks from experience on the topic, having gone through an ambitious integration process over the last few years resulting from the 2014 acquisition by John Hancock of New York Life’s retirement plan business. Coming from the New York Life side of the equation, he worked hand in hand with Peter Gordon, the previous CEO of John Hancock Retirement Plan Services (RPS), to join the two companies, each of which had a strong culture and way of doing business. Today, the combined entity ranks 16th largest in terms of assets, fourth in terms of the number of plans served and 15th by number of participants.

“Right from the beginning of our integration, Peter and I made a conscious effort to focus first and foremost on combining the cultures of the companies and really making sure that we honored the past of both legacy organizations,” Murphy recalls. “We committed to the elements that made each organization successful in its own right and wanted to make sure that when we combined the organizations, we had a solid culture and foundation on which to build. A successful integration is not just about the technology solutions and systems.”

According to Murphy, a big part of any successful corporate integration of this magnitude is to “check the egos at the door.”

“In our case, although each company was very good in its respective markets, there were things we could learn from each other, and there were elements that quite honestly had to go on both sides,” Murphy says. He adds that it was particularly important to move away from unnecessary manual processing of information and customer requests. He says this was an important factor in accomplishing a successful integration that started way back in 2014. Given how the industry has developed, it’s all the more important to consider in 2019.

“We decided early on that the new organization had to be fast, easy and convenient to work with. That meant being digital first or digital only in some use cases, and it meant building straight-through processing that could create a more efficient experience for both employees and customers,” Murphy says. “That effort took years to play out. It took years to integrate and modernize the combined entity, and then to optimize the processes and procedures to create that better customer experience took even more time.”

Murphy advises the leadership at Principal to avoid the temptation to make decisions based on the potential for short-term cost savings.

“We knew that if we took the sufficient time and we deployed the right technology, we could continue to grow the company without having to add or lose much staff,” Murphy says. “We knew it was important to keep the team members that came over from New York Life, and they allowed us to continue to grow thoughtfully over time.”

According to Murphy, it is also crucial for a successful integration not to underestimate the importance of communication throughout the entire process. He says this includes communication to the outside world, communication to clients and communication to employees.

“I don’t think people are averse to change in itself necessarily, which is why the communication element is so important,” Murphy says. “What people really fear is that a change will create something that is less than what they are used to. They’re afraid that a new way of doing business will mean they aren’t needed anymore. Really the opposite is true, and this needs to be clearly communicated. It’s not that we don’t need people from the legacy organizations, it’s that we need people focusing on the services that we know add the most value to our customers.”

Murphy adds that employees across all levels of the organization should be empowered to speak up about where the most and least value is being delivered to clients.

“We have benefited from encouraging our employees to feel entrepreneurial and to come up with their own ideas about how we may be able to change our processes to deliver greater value and to be more efficient,” Murphy concludes. “I think this approach has created a new excitement and commitment among the staff of the combined organization.”

«