The focus of U.S. litigation challenging plan investments has
been 401(k) plans, but that may be changing. Defined benefit plan
sponsors may have felt that they were immune to these types of
claims because the funding rules require them to make up investment
losses, but defined benefit plans are now becoming targets in class
wrote about an appellate decision permitting participants in
the Weyerhaueser defined benefit plans to pursue a class action for
equitable relief if they prevailed on their claims that the plans
were disproportionately invested in risky alternative investments
in violation of ERISA.
Now we have had another complaint seeking class certification,
which challenges U.S. Bancorp's investment of 100% of its
assets in equities from 2007 through 2010, allegedly causing the
plan to lose over a billion dollars, as well as the way its
security lending program was managed. The U.S. Bancorp suit
targets a large group of defendants, including the former
investment adviser, the trustee, the members of the Compensation
and Investment Committees and those members of the Board of
Directors who were not on the committees, who allegedly failed to
monitor the activities of the appointed fiduciaries.
What Happened Here?
The plan's investment manager, FAF Advisors, was a
subsidiary of U.S. Bancorp. FAF not only invested 100% of plan
assets in equities, but was said to have invested over 40% in its
own mutual funds, which plaintiffs claim caused it to personally
benefit from the use of plan assets by increasing its assets under
management and making the funds more attractive to other investors.
FAF is also alleged to have invested collateral from the plan's
securities lending portfolio in low quality investments, including
commercial paper backed by subprime mortgages.
As a result of the plan's investment program, its ERISA
funded status went from 144% (i.e., there was a funding surplus) to
84% during the period in question. Plaintiffs charge violations of
the duties of prudence, diversification and loyalty, and also
maintain that the defendants caused the plan to engage in
prohibited transactions. An interesting charge in the complaint is
that U.S. Bancorp sought to maximize investment return and upside
potential over minimizing the risk of loss because a higher return
on assets flows through to earnings per share, increasing the
per-share value of the company.
What Do the Plaintiffs Want?
The plaintiffs aren't seeking monetary damages, and
don't allege that these ERISA violations put their pension
payments in jeopardy. They are seeking equitable relief of the type
the Weyerhaueser decision permitted its class to pursue.
Specifically, the plaintiffs are demanding that the responsible
fiduciaries –who are personally liable for losses resulting
from breaches of fiduciary duty –make the plan whole for any
losses resulting from the breaches, and disgorge any profits they
made from the use of plan assets. The plaintiffs also want an
independent fiduciary appointed to replace the current plan
fiduciaries, or, failing that, an order preventing the plan from
again engaging in these policies and directing the fiduciaries to
properly review investments.
The Takeaways for Fiduciaries
The plaintiffs still have to obtain class certification and
prove their case, but it is certainly unusual for a large plan such
as U.S. Bancorp's to be invested only in equities. The
defendants will probably answer that there are existing prohibited
transaction class exemptions permitting investment in affiliated
mutual funds and securities lending, but the exemptions have
specific conditions and do not cover personal benefit from plan
assets or using plan assets as "seed money" for new
This is one to follow, but this lawsuit should serve as
a wake-up call now to directors who may consider themselves
absolved from pension responsibility because other fiduciaries have
been appointed to handle investments.
Under ERISA, the directors always have supervisory
responsibility that cannot be delegated away. Plan fiduciaries
should also think carefully before pursuing non-traditional
investment programs that do not include diversified asset classes
and establishing programs that do not include independent advisors.
Those will be red flags for participants and attorneys looking for
future class action defendants.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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