Judge Grants Class Certification in Citigroup Proprietary Fund Suit

The judge addressed arguments related to commonality of 401(k) participants in the suit.

A federal judge has granted class certification in a lawsuit alleging Citigroup violated its fiduciary duties under the Employee Retirement Income Security Act (ERISA) by offering and keeping affiliated funds in its 401(k) plans when better-performing, lower-cost funds were available.

In 2014, U.S. District Judge Sidney H. Stein of the U.S. District Court for the Southern District of New York found the participants’ claims were not filed outside ERISA’s statute of limitations. In 2015, a third lead plaintiff was added to the suit and Stein rejected arguments from defendants that the new plaintiff did not fall within the statute of limitations. In his latest order, he revised his previous decision and struck the third plaintiff as a named plaintiff in the lawsuit.

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Also, before moving on to the matter of class certification, Stein addressed the defendants argument that the remaining two named plaintiffs did not have standing to bring claims regarding affiliated funds in which they did not invest.  Of the nine affiliated funds through which they allege the plan suffered losses, the two lead plaintiffs only invested in one.

Citing prior case law, Stein said that in the context of class actions, a named plaintiff who has constitutional standing to raise claims based on his own injuries may also have “class standing” to assert “other claims, unrelated to those injuries,” on behalf of unnamed class members. “The fact that only some of these alleged losses manifested themselves in the named plaintiffs’ individual accounts does not deprive plaintiffs of their standing to seek redress on behalf of the Plan for the broader injuries the Plan incurred. Proving the ‘interrelated and overlapping’ duty of prudence and loyalty claims that are at issue in this case will require an inquiry into defendants’ conduct in managing the Plan, which plaintiffs allege was uniform and not dependent on the idiosyncratic characteristics of any proprietary funds,” he wrote in his order.

In addressing each of the factors for determining class certification, Stein agreed with defendants that some of the questions enumerated by plaintiffs are inadequate to establish commonality. For example, the claim that the affiliated funds’ fee were excessive compared to alternatives requires fund‐by‐fund analysis and cannot generate answers that are common to the entire class plaintiffs seek to represent, he said. However, he found that plaintiffs have established commonality by identifying at least two questions that are capable of class-wide resolution: whether the defendants improperly favored proprietary funds in order to benefit Citigroup at the expense of plan participants, and whether the defendants failed to prudently and loyally monitor the plan’s investments.

Stein also addressed the defendants’ argument that commonality is not met because some class members’ knowledge may fall outside of ERISA’s statute of limitations. Citing prior case law, he said “bald speculation that some class members might have had knowledge cannot be enough to forestall certification.” In addition, Stein said the basis of defendants’ speculation—that class members, who are or were Citigroup employees, would be aware that the affiliated funds were proprietary and would also be privy to their expense ratios—does not suffice to establish the kind of “specific knowledge of the actual breach of duty” required to start the clock on ERISA’s three‐year limitations period.

Finally, Stein rejected the defendants’ argument which suggested the fact that Citigroup employees “routinely” sign releases waiving all claims against Citigroup, including claims brought under the ERISA statute, precludes certification. “In cases brought on behalf of a plan, most courts have held that ‘individuals do not have the authority to release a defined contribution plan’s right to recover for breaches of fiduciary duty;’ the consent of the plan is required for a release of 29 U.S.C. § 1132(a)(2) claims,” he wrote in his motion.

According to the motion, the class that the plaintiffs seek to have the court certify extends from October 18, 2001, to September 4, 2007. September 4, 2007, is the date on which defendants removed all of the affiliated funds except the Citi Institutional Liquid Reserves Fund from the plan. However, none of the affiliated funds were actually managed or offered by Citigroup affiliates after December 1, 2005—the date on which Citigroup sold its asset management business to Legg Mason. So, Stein agreed with the defendants that none of the claims in the case are viable after December 1, 2005.

He certified a group of all participants in the Citigroup 401(k) plan who invested in any of the nine affiliated funds from October 18, 2001, to December 1, 2005, excluding the defendants, their beneficiaries, and their immediate families.

Retirees Still Have 80% of Savings After Nearly Two Decades

More than one-third of retirees continue to grow their assets, BlackRock found.

Research conducted by the BlackRock Retirement Institute and the Employee Benefit Research Institute (EBRI) found that after nearly two decades of being retired, the average retiree still has 80% of their nest egg intact.

The researchers say this finding challenges long-held fears about retirees spending down their savings too fast. They also discovered that more than one-third of retirees continue to grow their assets late into life, “leaving considerable potential consumption on the table.” And for all of the talk about long-term care insurance, the researchers found that burdensome late in life out-of-pocket medical expenses are faced by only a small portion of retirees.

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Despite all of this good news, BlackRock and EBRI say, retirement for future generations will be more challenging. The reason why retirees may be in such a strong position for the time being, they say, is because of changes to Social Security and Medicare, the fact that many of today’s retirees have pensions, strong performance by the stock market in recent years, and a healthy real estate market. The researchers found that after 18 years of retirement, the wealthiest group, those with $500,000 or more of savings, had retained 83% of their assets. But even those with $200,000 to less than $500,000 of savings had retained 77% of their assets, and those with less than $200,000 retained 80%.

“This supports prior research that suggests households tend to preserve retirement assets, with rates of returns on those assets often exceeding withdrawals,” the researchers explain in their report, “Spending in Retirement … Or Not?” As a result, “asset balances for many retirees grow through at least 85 years old.”

The report also found that among the highest, middle and lowest wealth groups, their income replacement ratios range from 60% to 70%. The research also found that retirees in all three income brackets lowered their spending the more years they were retired, with the highest wealth group showing the largest spending drop over time. The researchers said the decrease in spending is probably due to less money spent on transportation and entertainment as people age.

“It would appear that for most retirees, keeping up with the day-to-day expenses of retirement isn’t requiring them to dip into their retirement capital,” the report says.

The reason why retirees are being so frugal, the researchers say, is they are worried about long-term care and longevity. They might also want to leave an inheritance to a family member.

While 42% of the current retirees the researchers studied have a pension, fewer future retirees will be so lucky, they say. Social Security benefits may also be reduced, and future retirees who will rely more heavily on tax-qualified savings vehicles such as 401(k) plans will see their income cut by taxes, they add. Also, many experts do not expect the markets’ rates of return to be as strong in coming years, and people continue to live longer.

In conclusion, BlackRock and EBRI say, “shifting demographics and a more challenging market environment will only elevate the complexity and importance of helping retirees maximize the value of retirement savings.” If future retirees save more and work with an adviser, however, they can overcome these obstacles, the researchers say.

The “Spending in Retirement … Or Not?” report can be downloaded here.

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