Compliance October 17, 2014

Court Dismisses Stock Drop Case Against UBS

A federal district court judge has found a participant in the UBS Savings and Investment Plan (SIP) lacks standing to sue regarding the offering of UBS company stock in the plan’s investment lineup.
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In part due to the lack of standing, the judge also denied the participant’s request to amend her complaint following the U.S. Supreme Court’s decision in Fifth Third Bancorp v. Dudenhoeffer that fiduciaries of employee stock ownership plans (ESOPs) are not entitled to any special presumption of prudence under the Employee Retirement Income Security Act (ERISA). 

U.S. District Judge Richard J. Sullivan, of the U.S. District Court for the Southern District of New York, first noted that to establish standing, a participant must show a personal injury was suffered due to the breaches alleged to have been committed by plan fiduciaries. He rejected plaintiff Debra Taveras argument that a plan participant need not show a direct, individualized injury to establish standing. Taveras said, “All of the cases that are relevant and germane and talk about damages in an ERISA case, talk about harm to the plan, as opposed to harm to individuals,” and that all of the cases to which she refers look at damages at the plan level, not the individual investor level. Sullivan said Taveras’ reliance on those cases “is misplaced, since those decisions involved ERISA plans that managed assets on behalf of plan participants, with each participant’s financial fortune tied to the plan’s overall success (or failure).” 

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He noted that SIP participants directed the SIP to make investments on their behalf by choosing from a menu of investment options selected by the plan’s fiduciaries. Each participant’s individual SIP account was comprised of only the investments they personally selected, so it necessarily follows that Taveras can only demonstrate a constitutionally sufficient injury by pointing to her individual account’s specific losses during the class period. Sullivan pointed out that the complaint only says “as a direct and proximate result of the breaches of fiduciary duties alleged herein, the Plan, and indirectly Plaintiff and the Plan[’s] other Participants and beneficiaries, lost a significant portion of [its] investments meant to help Participants save for retirement.” According to Sullivan’s opinion, the complaint does not allege whether or when Taveras, through the SIP, purchased shares of the UBS Company Stock fund or when she sold those shares or the amounts of those investments. 

Regarding Taveras’ motion to amend her complaint in light of the Dudenhoeffer decision, the judge noted that Taveras had filed multiple complaints in the case, and the court already denied one such motion to amend, saying the time for Taveras to make a motion to amend has “come and gone.” Secondly, Sullivan said Taveras’ assertion that the Dudenhoeffer decision has changed the landscape for claims arising under ERISA “overshoots the mark.” He noted that, in this case, the 2nd U.S. Circuit Court of Appeals already determined that the presumption of prudence does not apply to the SIP because the company stock fund was not required to be offered as an investment choice by the plan document. So, the Supreme Court’s rejection of the presumption of prudence in general has little impact on Taveras’ case. 

Finally, Sullivan said Taveras’ lack of standing renders any attempt to amend the complaint “an exercise in futility.” 

Taveras alleged that the UBS defendants breached their duties to the SIP by failing to eliminate the UBS Company Stock fund from the menu of investments between April 26, 2007, and October 16, 2008. At the time, UBS suffered losses due to its heavy investments in residential mortgage-backed securities and collateralized debt obligations. 

Sullivan’s court opinion is here.

Data & Research October 17, 2014

U.S. Not as Proactive with Pensions as Other Countries

America’s pension system slipped two places and has fallen to 13th in the world in the Melbourne Mercer Global Pension Index (MMGPI).
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However, Emily Eaton, a senior consultant in Mercer’s International Consulting Group, in New York City, tells PLANSADVISER the U.S. fell, in part, because five countries were added to the index this year, and two of those ranked above the U.S. “When we talk about the U.S. system, it shouldn’t be a focus on score change. We have new countries that rank above the U.S. as well as those countries that already ranked above us previously,” she says.

However, the U.S. ranking does warrant some consideration. According to the MMGPI report, the overall index value for the American system could be increased by:

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  • raising the minimum pension for low-income pensioners;
  • adjusting the level of mandatory contributions to increase the net replacement for median-income earners;
  • improving the vesting of benefits for all plan members and maintaining the real value of retained benefits through to retirement;
  • reducing pre-retirement leakage by further limiting the access to funds before retirement; and
  • introducing a requirement that part of the retirement benefit must be taken as an income stream.

 

Eaton says the first two are referring to America’s Social Security system. “We looked at Social Security and what the poorest workers get and what middle-income workers are likely to get.”

As for the third recommendation, Eaton says she looks at it like the two sides of a coin. She explains that the younger generation, who are mostly covered by defined contribution (DC) retirement plans, are more likely to move around; they could have four or more different employers by age 30, for example. If DC plan vesting schedules take three or six years for a participant to fully vest, this seems like it’s not a very long time, she notes, but it could be detrimental to younger participants. “We’re seeing the vesting issue become much more of a challenge as the retirement plan landscape shifts from DB to mostly DC and younger participants have more volatile employment. The solution is immediate vesting, something Australia does.” (Australia ranked No. 2 in the MMGPI.) However, Eaton points out that whatever younger participants do get to keep will increase in value over time with investment returns.

On the flip side, participants who have worked for years and are vested, and may even have a DB benefit, see the value of their retirement accounts go down over time as benefits may be frozen at a certain amount. They are invested conservatively and they are drawing down their accounts.

As for introducing a requirement that part of the retirement benefit must be taken as an income stream, Eaton notes that if you look at all countries in the report, there are only six that have either no requirement for taking benefits in an income stream or no tax incentive for doing so.

“Adequacy remains a major concern for the U.S. system,” Eaton says. “Looking forward, as employees become increasingly aware of their accountability for their retirement security, and as employers improve their methods of enabling their employees to make good decisions based on their personal situation, adequacy may improve through private-sector defined contribution plans. There are also a number of proactive regulatory changes that could be made to improve adequacy.”

According to Eaton, regulatory changes could include increasing the tax disincentive for taking distributions of retirement assets instead of rolling them over, or even forbidding the withdrawal of assets at the time of a job change. “We have tax disincentives for participants to take cash rather than roll over, but people do it anyway,” she notes.

Other regulatory changes that could be made to improve the U.S. retirement system are mandatory automatic enrollment, increasing mandatory contributions, and anything the government can do to encourage participation and encourage participants to keep their money in the system, Eaton says.

She mentions that other countries’ scores in the MMGPI have increased due to proactive measures taken in those countries. For example, other countries have increased the retirement age at which individuals can get government benefits to keep up with changing life expectancy. “This provides a double benefit,” Eaton contends. “Employees work longer, so they save longer, and it decreases the amount of time in retirement for which they will need their savings.”

Other countries have also increased mandatory contributions, increased minimum pension levels, and some countries ranked above the U.S. have mandatory occupational private pension plans in addition to government pension systems. For example, in Australia, Eaton notes, employers are required to give employees a superannuation DC contribution or pay a tax that is higher than what they would contribute for employees.

Denmark ranked No. 1 in the index. According to Eaton, some reasons include: it has a mandatory occupational scheme on top of the government system, there’s a small gap between life expectancy and the retirement age, the mandatory schemes are fully funded, and there are measures in place for employees approaching retirement to be able to continue working while accessing some retirement benefits.

Eaton says it is clear that retirement security for Americans is an issue, and the survey has a lot of focus on what is mandated in each country, but even if the U.S. government is not proactive to address the issue, plan sponsors can be.

The Melbourne Mercer Global Pension Index report may be downloaded from here.

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