A U.S. District Court has ordered Foot Locker to reform its cash balance
plan to calculate accrued benefits in a way expected by participants.
U.S. District Judge Katherine B. Forrest of the U.S.
District Court for the Southern District of New York found that the plan’s
summary plan description (SPD) as well as other communications to participants
failed to inform them that their benefits would be in a period of “wear-away”
during which new accruals would not increase the benefit to which a participant
was already entitled.
Upon conversion from a traditional defined benefit (DB) plan
to a cash balance plan design, Foot Locker established a beginning balance
based on a participant’s earned DB plan benefit and a 9% discount rate, as well
as a mortality discount. Following the conversion, participants’ account
balances were credited with pay credits and an interest credit at a fixed
annual rate of 6%. The company understood that for years, the account balance
under the new formula would be smaller than the ending accrued benefit under
the traditional DB plan for most participants. So, to avoid a violation of the
Employee Retirement Income Security Act’s (ERISA’s) anti-cutback rule, the plan
provided that retiring employees were entitled to the greater of the benefit
accrued under the DB plan or the cash balance plan benefit.
According to Foot Locker, participants had the information
necessary to inform them they were in a period of wear-away. The company
concedes that it did not describe wear-away explicitly because it believed it was
too complicated and its variations and effects too unpredictable. But, Forrest
disagreed, finding from testimony of plan participants that the communications
to them led them to believe their pension benefits were growing with their
years of service.
In her opinion, Forrest said all of the communications share
core common characteristics: all failed to describe wear-away, and all failed
to clearly discuss the reasons for the difference between a participant’s
accrued benefit under the old plan and his or her balance under the new plan.
She determined that all the statements were intentionally false and misleading,
and that the SPD contained a number of intentionally false misstatements.
“Here, there is no doubt that Foot Locker committed
equitable fraud,” Forrest wrote. “It sought and obtained cost savings by
altering the Participants’ Plan, but not disclosing the full extent or impact
of those changes.”
Comparing the case to that of Amara v. CIGNA Corp.,
but calling Foot Locker’s violations “more egregious,” Forrest said to remedy
Foot Locker’s misrepresentations, the plan must be reformed to actually provide
the benefit that the misrepresentations caused participants to reasonably
expect. With respect to class members who have already retired, the court
ordered that retirees and former employees shall be entitled to receive the
difference in value between the reformed plan calculation and the benefit they
received, in addition to prejudgment interest at a rate of 6% per annum.
Forrest ordered Foot Locker to enforce the plan as reformed,
but ordered that all of the remedies provided be stayed to allow the parties to
pursue an appeal, if they so choose.
The opinion in Osberg v. Foot Locker, Inc. is here.
Participants Sue Allianz Retirement Plan Fiduciaries
A lawsuit filed by two participants in an Allianz retirement
plan claims the company and its asset management partners, including PIMCO, misused
employees’ 401(k) plan assets for their own financial benefit.
Plaintiffs level a host of complaints against two sets of defendants
overseeing the Allianz Asset Management 401(k) plan, suggesting the “total plan
cost of 0.77% is outrageously high for a defined contribution plan with over
$500 million in assets.”
Named in the complaint are Allianz Asset Management of
America (both AAM-LP and AAM-LLC), as well as “the Committee of the Allianz
Asset Management of America, L.P. 401(k) Savings and Retirement Plan … [Chief
Operating Officer and Managing Director of AAM] John Maney … and John Does 1 to
30 … who improperly managed Plan assets for the benefit of themselves and their
affiliates instead of the Plan and its participants.”
Several participating employers are also named in the complaint.
These include: “AAM-LP and AAM-LLC (collectively, ‘AAM’), Allianz Global
Investors Fund Management LLC, Pacific Investment Management Company LLC (‘PIMCO’),
Allianz Global Investors U.S. LLC, and NFJ Investment Group LLC … who improperly received plan assets as profits
at the expense of the Plan and its participants.”
Lead plaintiffs Aleksandr Urakhchin and Nathan Marfice filed
their claim in the U.S. District Court for the Central District of California,
seeking an order for Allianz and company “to remedy breaches of fiduciary duties
and unlawful self-dealing.” Plaintiffs seek to recover the financial losses
suffered by the plan through improper fees and self-dealing, and to obtain
injunctive and other equitable relief from the defendants, as provided by ERISA.
Case documents show Urakchin and Marfice accuse
defendants of “[treating] the plan as an opportunity to promote the Allianz
Family’s mutual fund business and maximize profits at the expense of the Plan
and its participants.” The accusations go beyond lax oversight commonly alleged
in ERISA cases and suggest proactive self-dealing by defendants.
“The Fiduciary Defendants have loaded the Plan exclusively
with mutual funds from the Allianz Family, without investigating whether Plan
participants would be better served by investments managed by unaffiliated
companies,” the compliant suggests. “The selection of these proprietary mutual
funds costs Plan participants millions of dollars in excess fees every year.
For example, in 2013, the Plan’s total expenses were 75% higher than the
average retirement plan with between $500 million and $1 billion in assets (the
Plan had $772 million in assets as of the end of 2013), costing Plan
participants over $2.5 million in excess fees in 2013 alone.”
NEXT: Performance and
peer plans
According to the plaintiffs, citing various pieces of
industry research, among the 550-plus defined contribution plans in the United
States with between $500 million and $1 billion in assets as of the end of
2013, the Allianz plan in question “was one of only eight plans that had total
plan costs that were 0.74% (of total plan assets) or higher. The Plan’s high
costs can be attributed entirely to the Fiduciary Defendants’ selection of
high-cost proprietary mutual funds as investment options within the Plan.”
Finally, plaintiffs suggest the funds were not just
expensive, but unproven, and, in some cases, inappropriately risky for a long-term
401(k) plan investor.
Other details in case documents show plaintiff Aleksandr
Urakhchin has participated in the plan since 2011, “and is a current
participant in the plan within the meaning of 29 U.S.C. §§ 1002(7) and 1132(a)(2)–(3).”
Plaintiff Nathan Marfice has participated in the plan “since before 2009, and is
a current participant in the plan.” Both are California residents, according to
the compliant.
The plan in question was established on January 1, 2003, via
the merger “of certain predecessor plans.” These include the PIMCO Savings
Plan, the PIMCO Retirement Plan, the NACM 401(k) Plan and the NACM Pension Plan.
Prior to 2011, the plan was known as the “Allianz Global Investors of America
L.P. 401(k) Savings and Retirement Plan.” It is a defined contribution 401(k) plan
within the meaning of 29 U.S.C. § 1002.
According to case documents, the Plan has been amended and
restated multiple times since it was established, most recently on October 29,
2012, under oversight of AAM-LLC.
Defendant John Maney, COO and managing
director for Allianz Asset Management, is called out by name because “he is the
sole member of the management boards of both AAM-LP and AAM-LLC.” Maney is also
the CEO of defendant Allianz Global Investors Fund Management LLC and the managing
director of Defendant Allianz Global Investors U.S. LLC.
According to the complaint, Maney “signed the Plan Document
in his capacity as Managing Director and Chief Operating Officer of AAM. By
virtue of his management and Board positions at AAM-LP and AAM-LLC, Maney has
authority to appoint a recordkeeper and trustee, amend the Plan Document, and
appoint and remove members of the Committee. This gives Maney discretionary
authority and control over the administration and management of the Plan as
well as discretionary control and authority regarding the management and
disposition of Plan assets … Accordingly, Maney is a Plan fiduciary under 29
U.S.C. § 1002(21)(A).”
NEXT: Target-rich
environment
The complaint further alleges each of the fiduciary defendants
“are also subject to co-fiduciary liability under 29 U.S.C. § 1105(a)(1)–(3),
because they enabled other fiduciaries to commit breaches of fiduciary duties
through their appointment powers, failed to comply with 29 U.S.C. § 1104(a)(1)
in the administration of their duties, and failed to remedy other fiduciaries’
breaches of their duties, despite having knowledge of the breaches.”
PIMCO is cited as “a Plan employer within the meaning of 29
U.S.C. § 1002(5),” because it acts as the investment adviser for 23 of the
investment options offered within the plan. According to the complaint, throughout
the statutory period, the only core investment options offered within the plan
have been investments managed by either PIMCO or Allianz Global Investors, both
of which are subsidiaries of AAM.
By 2013, plan participants were offered 45 proprietary
mutual funds, two proprietary collective trust funds, and a self-directed
brokerage account option. The core investment options consisted of 12
target-date funds, six balanced funds, 12 domestic equity funds, five
global/international equity funds, six domestic bond funds, two international
bond funds, and four specialty funds in technology, currency, commodities, and
real estate. By the end of that year assets had increased to approximately $772
million, consisting of $628 million in proprietary mutual funds, $44 million in
proprietary collective trust funds, $93 million in SDBAs, and $7 million in plan
participant loan liabilities.
Taking into account all administrative and investment
expenses within the plan, and using 2013 year-end balances (as reported on Form
5500 for 2013) and publicly available information regarding each investment’s
expenses, plaintiffs estimate that “total plan costs for 2013 were
approximately $5,950,000, equal to 0.77% of the $772 million in Plan assets.”
Plaintiffs suggest this fee level “is outrageously high for
a defined contribution plan with over $500 million in assets,” suggesting the “average
fee” for this segment is closer to 0.44%. “Forty-three of the 45 proprietary
mutual funds within the Plan in 2013 had expenses that were above the average
for plans with between $500 million and $1 billion in assets, and many of those
funds had expenses that were two to three times higher than the average for
similarly-sized plans.”
NEXT: Seeding new
funds through 401(k)?
According to the complaint, the defendants’ alleged imprudence
in selecting unreasonably expensive funds is not the result of mere negligence.
“Rather, the Fiduciary Defendants intentionally exposed Plan
participants to unreasonably high fees because doing so significantly benefited
the Allianz Family. This is perhaps best illustrated by the Fiduciary
Defendants’ improper use of the Plan to promote new and untested mutual funds
for the purpose of furthering the Allianz Family’s mutual fund business.”
A variety of PIMCO-provided investment funds and series are named
in the complaint, including target-date funds. Defendants suggest the
competitive pressures of the investing industry drove plan fiduciaries to include
new and untested investment products on retirement plan menus, in essence to
help Allianz and PIMCO turn profits more quickly from new and developing funds.
The compliant goes as far as accusing PIMCO/Allianz of
conspiring to use the plan’s qualified default investment alternative (QDIA)
slot to “to funnel plan assets into untested funds.”
Allianz, PIMCO’s
parent company, shared the following statement with PLANADVISER: "Allianz Asset Management, PIMCO and Allianz Global Investors offer employees a wide range of investment options to save for retirement and provide plan participants the flexibility to elect to invest in affiliated and non-affiliated investment products. Our 401(k) plan has been administered in accordance with applicable rules for the benefit of our participants. The action is without merit; we are confident it will be resolved accordingly."