Compliance February 4, 2013

ESOP Challenged on Post-Recession Plan Change

Former employees of Jeld-Wen Inc. filed a lawsuit claiming an amendment to the firm’s employee stock ownership plan (ESOP) took away their benefits.
Reported by

According to the complaint filed in the U.S. District Court for the District of Oregon, prior to November 19, 2009, the Jeld-Wen ESOP governing plan document provided that a plan participant who had separated from service but was not yet 55 years of age and was therefore ineligible for early retirement, would have his or her vested accrued benefit under the plan calculated based on the year-end valuation of Jeld-Wen stock in the year that he or she terminated employment. That value would be placed in an “Undistributed Account” and continue to accrue interest at 3% until the plan participant was qualified to receive and received a full distribution of his or her benefits under the plan document.    

The former employees first claim that fiduciaries of the ESOP did not prudently invest sufficient assets of the plan, including by not investing the assets of the plan in diversified investments, so that it could honor its obligation and pay the benefits that were unrelated to the current value of Jeld-Wen stock.   

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In 2008, the value of Jeld-Wen stock began to decline. Between December 31, 2007, and December 31, 2011, the value of Jeld-Wen stock declined more than 70%, the complaint says. This decline combined with the number of separated employees resulted in the Jeld-Wen ESOP facing the prospect of a shortfall. So, in November 2010, Jeld-Wen amended the plan to change the value and amount of the vested and accrued benefits of separated employees.The amendment eliminated the 3% rate of interest and provided that the “Undistributed Accounts” would be valued based on the current value of company stock.The amendment also permitted the assessment of new expenses against the accounts of all participants in the ESOP, including separated employees.   

According to the complaint, plaintiffs’ benefits based on or maintained in the “Undistributed Accounts” declined by more than 43% as a result of the decline in Jeld-Wen stock and were assessed expenses totaling 8% of the balances. The former employees charge that this violates the anti-cutback provision of Section 204(g) of the Employee Retirement Income Security Act (ERISA). In addition, they allege the administrative committee of the Jeld-Wen ESOP violated its obligations to discharge their duties solely in the interest of participants and beneficiaries, and for the exclusive purpose of providing benefits to the participants and beneficiaries, with care, skill, prudence and diligence.  

They are seeking class action status and for the court to order that the amount separated participants will receive as an accrued benefit under the plan will be calculated as if the 2010 ESOP amendment had never been adopted. The lawsuit also asks that Jeld-Wen and other defendants pay the difference, plus interest, to or on behalf of class members who received less in benefits than the amount to which they were entitled.  

The complaint in Jimerson v. Jeld-Wen Inc. is here.

The Markets February 1, 2013

Investor Demand for Income, Alternatives to Rise

Concern over market volatility remains on high alert, and returns are expected to dip, according to research by Casey Quirk and eVestment.
Reported by

The 2013 Consultant Search Forecast surveyed investment consultants to forecast their investment preferences and buying behavior among U.S. institutional investors.

Search activity in 2013 will be guided by many of the same portfolio trends seen in recent years, the report said. Alternative investments, yield, portfolio globalization and outcomes will continue to dominate the investment landscape. However, investors are increasingly sharpening their focus on risk management and downside protection, with three-quarters of consultants reporting an increased client focus on risk.

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Investment consultants in the U.S. expect substantially lower returns from portfolios, forecasting an average return of 7% in 2013 and beyond, compared with 2010 expectations of 8%.

Private equity, hedge funds, real estate and commodities will drive a combined 24% of total manager search activity in the U.S. and 28% of new or expanded investment mandates this year, the report found.

“The sectors that are showing change are very specific to the universe,” Benjamin Olmstead, vice president of new product innovation at eVestment, told PLANADVISER.

“The sector trends for an actively managed U.S. equity product are often very different from the sector trends in an emerging markets equity strategy. 

Olmstead said eVestment would focus on the emerging markets equity space since this was top of the list for the most sought-after asset classes for 2013.  For emerging markets equity, eVestment saw increased allocations to technology (+2.18%),  financial services (+1.64%) and consumer staples (+1.56%) during 2012. Sectors with decreasing allocations were materials and processing (-2.65%), energy (-1.53%) and producer durables (-0.33%).

“Traditional benchmark investing is no longer a sufficient stand-alone vehicle for driving flows into today’s volatile marketplace,” Olmstead said. “Managers have to focus on outcomes, not just their strategies, to remain successful and maintain and grow client share.”

Survey results indicate that emerging markets equity is expected to be the most sought-after strategy in 2013, representing 9% of all search activity—an increase of three percentage points over the previous year. Consultants also expect clients to round out their exposures with capitalization and style-specific global mandates.

Concern about volatility, given the current state of economies worldwide, remains high among institutional investors, and 75% of consultants reported elevated client focus on measuring and managing risk. Consultants said their clients continue to seek higher-yielding fixed-income strategies.

Consultants forecast emerging markets debt and high-yield fixed income will represent the third- and seventh-most popular asset classes in 2013, respectively, and a decreased interest in long-duration bonds.

(Cont’d...)

Olmstead called the survey a valuable tool for gaining a clear sense of marketplace demand.
“As we’ve seen in our database analysis over the past year, innovation and diversification of portfolio assets are driving investment behavior for this year’s survey respondents.” he said.

“For institutional investors, the line between U.S. and international investments continues to erode, meaning savvy consultants increasingly address client needs for liability management, income, diversification and volatility in a global context,” said Ben Phillips, partner at Casey Quirk. 

In 2012, the respondents conducted nearly 5,300 searches and placed a total of $400 billion in mandates. The survey was conducted over a month from December 2012 to January 2013, and polled U.S.-based investment consultants on forecasts for investment preferences and buying behavior among U.S. institutional investors, as well as retail intermediaries who select external managers on a client’s behalf. This year’s survey included responses from 35 investment consultants in the U.S., representing $14 trillion in assets under advisement.

eVestment is a global provider of institutional investment data intelligence and analytic solutions. Casey, Quirk & Associates is a management consulting firm serving the global asset management industry.

The 2013 Consultant Search Forecast report can be found on both eVestment and Casey Quirk’s websites. Please visit www.evestment.com and www.caseyquirk.com for copies of the full report. 

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