Institutional
assets tracked by the Wilshire Trust Universe Comparison Service (TUCS) saw a
median return of -4.53% in the third quarter—the worst quarterly performance in
four years and the first back-to-back losing quarters since the quarter ending
March 31, 2009.
Robert
J. Waid, managing director at Wilshire Associates, says, “Taft Hartley Health
and Welfare Funds was the best performing category losing only -2.79%, while
the worst performing category was large Foundations and Endowments with assets
greater than $500 million, which fell -5.37%.”
Corporate
Funds and large Corporate Funds with assets greater than $1.0 billion saw
median quarterly returns of -3.83% and -3.12%, respectively, as the only plan
categories with median returns better than the 60/40 portfolio. At the same
time, Taft Hartley Defined Benefit Plans and Public Funds had median returns of
-4.81 and -4.61 percent, respectively.
“Global
equity returns weighed heavily on the median returns for all plan types in the
third quarter,” Waid says. “Though the Wilshire 5000 Total Market Index had its
worst performance in four years by falling -6.91%, plans that diversified their
equity exposure from large-cap U.S. equity to either U.S. small-cap or non-U.S.
equity suffered more with returns of the Wilshire US Small-Cap Index falling
-10.88%, and the MSCI AC World ex U.S. even worse, shedding -12.17%.”
He adds that bond
returns normalized as the Barclays U.S. Aggregate Bond Index rose 1.23% for the
third quarter for a trailing 12-month return of 2.94%. “This translates to most
plan median returns underperforming the classic 60/40 portfolio return of -3.65%.”
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A federal judge has found that several defendants named in
an Employee Retirement Income Security Act (ERISA) lawsuit are not fiduciaries
and has dismissed some claims that BP failed to monitor fiduciaries.
The lawsuit had previously been dismissed based on the
Moench presumption of prudence for fiduciaries of retirement plans in which
company stock is offered as an investment. However, the 5th U.S. Circuit Court
of Appeals revived the lawsuit after
the Supreme Court ruling in Fifth Third Bank v. Dudenhoeffer that
fiduciaries do not have a presumption of prudence.
The plaintiffs in the suit allege that BP and BP America are
vicariously liable for their employees’ breaches of fiduciary duty under ERISA.
They argue that the corporate defendants “effectively controlled the individual
defendants” because the corporate defendants employed the individual defendants
and appointed them to plan-related positions. But, U.S. District Judge
Keith P. Ellison of the U.S. District Court for the Southern District of Texas
said more than an employer-employee relationship is required to meet the
vicarious liability test; it requires that the principal have “participated in
the agent’s breach.” He found that the plaintiffs failed to tie the corporate
defendants in any way to the individual defendants’ alleged breach.
The plaintiffs alleged that BP Corporation North America
Inc. (BPNAI) is a fiduciary because the plan document provides that BPNAI is
the “Plan Sponsor.” But, Ellison said this provision is of no consequence to
fiduciary status: a “company cannot be subject to fiduciary liability simply by
virtue of its role as a plan sponsor.” In addition, he found the plan document
names the Savings Plan Investment Oversight Committee (SPIOC) the “Investment
Named Fiduciary,” and accordingly vests the SPIOC with authority and control
regarding the “management or disposition of any assets of the Trust” as well as
“the discretion to designate an Investment Manager.”
Ellison also dismissed the BP Board and designated officers
as being fiduciaries to the plans. The plan document grants no substantive
authority to the Board other than to act on BPNAI’s behalf “whenever [BPNAI]
has the authority to take action under [the] Plan.” Also, the designated
officers have no authority to limit or freeze investments in the BP Stock Fund
unless they are so “directed” by the SPIOC.
NEXT: The duty to monitor fiduciaries
Ellison found that the plaintiffs adequately allege that the
insider SPIOC defendants—who were appointed by the appointing officers—breached
their fiduciary duties to the plan.
However, he disagreed with plaintiffs’ claims that the
appointing officers violated their duty to monitor the SPIOC. According to
plaintiffs, the duty to monitor is composed of two fiduciary obligations: (1) a
duty to inform appointees of material, non-public information that is within
the possession of the monitoring fiduciary and could affect the appointees’
evaluation of the prudence of investing in the plan sponsor’s securities; and
(2) a duty to ensure that the monitored fiduciaries are performing their
fiduciary obligations.
Ellison concluded that ERISA does not impose a duty on
monitoring fiduciaries to keep their appointees apprised of material,
non-public information. He cited a ruling by U.S. District Judge Lewis A.
Kaplan of the U.S. District Court for the Southern District of New York in a
stock drop case against Lehman Brothers in which Kaplan found “nothing in ERISA
itself or in traditional principles of trust law” imposes such a duty. Ellison
determined that under the terms of the plan document, the appointing officers’
fiduciary authority and control was limited to appointing and removing members
of the SPIOC. Their fiduciary duties can be expanded no further.
Although the duty to monitor does not include a duty to
inform, it does include an obligation to take reasonable measures to ensure
that appointees are adequately performing their duties. In deciding whether the
plaintiffs sufficiently alleged that the appointing officers failed to
adequately monitor the members of the SPIOC, Ellison said the plaintiffs’ claim
that the appointing officers ignored “numerous ‘red flags’ that BP stock was
not a prudent investment for the retirement plan” misconstrues the relevant
law.
“The question is not whether Defendants had notice that the
BP Stock Fund was an imprudent investment, but rather whether the Appointing
Officers had ‘notice of possible breaches by [the members of the SPIOC] that
they failed to investigate,’” Ellison wrote in his opinion. Plaintiffs must
allege that the appointing officers had notice that the SPIOC members might be
knowingly investing in stock that was artificially inflated—not just that the
SPIOC members were investing in artificially inflated stock.
The court found that the plaintiffs have not pointed to any
such allegation in the complaint, and their duty-to-monitor claim against the
appointing officers fails as a result.
The opinion in IN RE: BP ERISA LITIGATION is here.