Profit Sharing Plan Sponsor Accused of Imprudently Managing Plan Assets

Among other things, the plaintiff alleged fiduciaries of the plan were imprudent in their consideration of participants’ varying interests and needs in the plan’s allocation structure and investment choices.

A federal district court judge has moved forward a lawsuit alleging that a profit sharing plan sponsor invested assets of the plan too conservatively for its employee base and failed to prudently manage the plan’s investments.

In denying a motion to dismiss the suit, U.S. District Judge Leo T. Sorokin of the U.S. District Court for the District of Massachusetts pointed out the difference between it and others cited by the defense in their motion to dismiss. The “plaintiff does not allege that one of the investment options plan participants were permitted to choose was managed too conservatively,” the judge noted.

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According to the court document, the DeMoulas (Restated) Profit Sharing Plan and Trust had approximately 11,000 to 13,000 participants “with a wide range of retirement needs and objectives,” and between $580 million and $756 million in assets between 2013 and 2017. The plan contains one investment into which participants are automatically enrolled. The plan’s investment policy statement (IPS) called for 70% of the plan’s assets to be allocated into domestic fixed income options and 30% to be put into equities.

The plaintiff—a former participant in the plan whose account was distributed in 2015—alleged that the plan’s one-size-fits-all target allocations are inappropriate even for participants nearing retirement, but are especially inappropriate for participants who are decades away from retiring. According to the court document, in his initial complaint, the plaintiff argued that experts, including one of the managers of the plan’s underlying accounts, recommend that participants have well over 30% of their retirement portfolio allocated toward equities at the time they retire, considering longevity, while recommending that participants further from retirement allocate as much as 96% of their portfolio to equities.

Sorokin noted in his opinion that the plaintiff not only alleged that fiduciaries of the plan were imprudent in their consideration of participants’ varying interests and needs in the plan’s allocation structure and investment choices, but that these failures were compounded by a failure to review and revise those choices over time.

The plaintiff alleged that the defendants often failed to meet their own equity allocation targets, in some years devoting as much as 86% to fixed income options, with the remainder (14%) to equities and, in some years, holding significant allocations to cash that failed to generate meaningful returns. The plaintiff also alleged the defendants failed to procure the lowest-cost share class of bond funds even though the plan was large enough to have the leverage to do so, and that they failed to monitor investment performance or choose better performing options to achieve the plan’s investment goals.

Considering the “totality of the allegations,” Sorokin found the “plaintiff has alleged sufficient facts from which it is reasonable to infer a plausible claim of violation of the duty of prudence” required of Employee Retirement Income Security Act (ERISA) fiduciaries.

Sorokin took as guidance the Supreme Court decision in Fifth Third v. Dudenhoeffer, which explained that “taken in context, [ERISA]’s reference to ‘an enterprise of a like character and with like aims’ means an enterprise with what the immediately preceding provision calls the ‘exclusive purpose’ to be pursued by all ERISA fiduciaries: ‘providing benefits to participants and their beneficiaries’ while ‘defraying reasonable expenses of administering the plan.’” In that decision, the high court also said “the statute’s requirement that fiduciaries act ‘in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter’… makes clear that the duty of prudence trumps the instructions of a plan document.”

Sorokin rejected the defendants’ attempt to liken the case to one dismissed by the 1st U.S. Circuit Court of Appeals, Barchock v. CVS Health Corp., and their argument that it should likewise be dismissed for failing to state a claim. The defendants cited the appellate court’s observation that “conservativism in the management of a stable value fund—when consistent with the fund’s objectives disclosed to the plan participants—is no vice,” and the court’s rejection of the allegation that “imprudence could be inferred from the fact that the fund’s cash allocation ‘was a severe outlier when compared to allocation averages for the stable value industry.’”

Sorokin pointed out the markedly different context of the allegations in the Barchock suit and the current case. And he pointed out that the court in Barchock repeated an observation it had made in Ellis v. Fidelity Management Trust Co.: “If informed plans or their participants do not want such funds, they will not select them over the innumerable options available.”

“Plaintiff alleges a series of facts occurring over time regarding both the allocation structure of the investment plan vis-à-vis the interests of the beneficiaries and the implementation of the plan that, taken together, plausibly allege a claim of imprudence,” Sorokin concluded. He noted that his denial of the motion to dismiss was “not a ruling that an ERISA plan must follow any specific path.”

Iowa Best Interest Standard Aligns with NAIC Model

Iowa’s new proposed conflict of interest mitigation rules are based closely on the model framework finalized earlier this year by the National Association of Insurance Commissioners—with some important differences.

Back in late February, the National Association of Insurance Commissioners (NAIC) granted final approval to its revised model regulation that sets the conflict of interest rules for insurance producers to follow when recommending annuity products to their clients.

The move came after years of work by the NAIC on the development of updated “best interest service” rules applying to insurance agents and representatives selling annuity products. With the NAIC’s approval, state insurance regulators are now free to adopt the model regulation into their own insurance regulations.

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This week, Iowa regulators proposed their own new rules to require financial professionals to act in the best interest of clients, applying to both insurance sales and the broader activities of financial advisers and broker/dealers. The proposal is primarily based upon the model regulation approved by the NAIC in February, but it also includes additional provisions that would hold broker/dealers and their representatives to a best interest standard under Iowa securities law.

Early interpretation from the likes of the Insured Retirement Institute (IRI) suggests the advisory and brokerage industry’s reaction to the Iowa rulemaking will be more positive than the reaction to related rules on the books in more progressive states, such as New York. However, as it has in other states, the IRI is voicing some concern that the Iowa rules contain “potential inconsistencies” when compared with the U.S. Securities and Exchange Commission’s Regulation Best Interest (Reg BI), which takes effect nationally on June 30.

“IRI and our members have long supported the creation of a workable best interest standard for financial professionals and we applaud the Iowa Insurance Division for moving so quickly to adopt the NAIC’s new best interest rules for insurance producers,” says Jason Berkowitz, IRI chief legal and regulatory affairs officer. “The proposed rules for securities professionals aim to align with Reg BI, but IRI and our members are concerned about a few subtle but important distinctions between the two.”

In comments filed with the Iowa Insurance Division, IRI says that the inconsistencies between federal rules and Iowa’s proposal could be addressed by “a clear exception or safe harbor for federally regulated broker/dealers and registered representatives acting in compliance with Reg BI.”

“In our view, this would be the most clear and direct way to avoid duplication and inconsistency,” Berkowitz says, noting the IRI has also suggested that the Iowa proposed regulation include “sufficient time to ensure that broker/dealers and registered representatives can appropriately comply with the new rules.”

Due to the ongoing challenges in dealing with the COVID-19 pandemic, IRI has also urged the Iowa agency to extend the comment period and postpone the public hearing for 90 days.

The full text of the Iowa proposal is available here, along with information about submitting comments during the next week before the deadline.

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