Verizon Settles 401(k) Complaint for $30M

Verizon Communications Inc. has agreed to pay $30 million to settle a complaint from 2016 related to allegations of an underperforming hedge fund in its retirement plan target-date funds, according to a July 7 filing in the U.S. District Court for the Southern District of New York.

Class representative Melina Jacobs and Verizon agreed to the proposed settlement, pending court approval, over allegations of Verizon and its employee benefits committee failing to uphold its fiduciary duty in monitoring the performance of a hedge fund called the Global Opportunity Fund and not taking “corrective action regarding the Fund despite obvious and long-term underperformance.”

In the case, Jacobs et al. v. Verizon Communications Inc. et al., Verizon’s attorneys had argued that the company had been following its fiduciary duty in monitoring the target-date funds managed by investment firms Russell Investments and J.P. Morgan. Other allegations regarding underperforming target-date funds and a lack of disclosures related to participant fee statements were dismissed in multiple rulings. Fidelity was also removed as a defendant in the lawsuit because it had not been a plan fiduciary.

But U.S. District Judge Paul G. Gardephe had allowed the Global Opportunity Fund argument to continue, with a trial set to begin this month, according to the court filing. Instead, after two days of negotiations, the parties came to an agreement on the $30 million payment. One-third of the settlement will go to the law firms representing the class, with the remainder going to plan participants as tax-deferred contributions to their accounts or rollovers into individual retirement plan accounts.

The plaintiffs were represented by law firms Glancy Prongay & Murray LLP, Schneider Wallace Cottrell Konecky LLP and Edgar Law Firm LLC. There are about 160,000 members in the class, according to the court filing.

Verizon did not immediately respond to a request for comment on the proposed settlement.

The plaintiffs’ attorneys wrote that, based on comparing the Global Opportunity Fund to an equity investment benchmark, the damages for the period between April 30, 2010, and January 31, 2017, would be between $102.6 and $231 million. They went on to say that the settlement amount, representing about 13% to 29.2% of those damages, “is appropriate, given the wide range of potential damage outcomes at trial—as well as the possibility of a verdict in favor of Defendant that would result in zero recovery for the Class.”

The Global Opportunity Fund, which had been included in part of the portfolio for target-date funds in the plan, used a strategy aiming to “add value, relative to its benchmark, by investing in the most attractive markets on a global basis, while simultaneously underweighting, or shorting, markets that are viewed by the fund managers as overvalued.”

The fund allegedly had a target rate of return of 12%, which “was subsequently lowered at least twice,” according to the filing. The plaintiff alleged that between 2007 and 2016, the fund “severely underperformed,” as its annualized net performance ranged from -10.32% to 13.88%, with negative returns in three years, ending with an earned aggregate of 1.4% at the end of 2016.