Compliance April 18, 2014

State Street Cleared of Wrongdoing in GM Stock Drop Suit

For the second time, a U.S. district court has found State Street Bank and Trust did not violate its duties to General Motors (GM) retirement plan participants in its decisions about holding company stock.
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The U.S. District Court for the Eastern District of Michigan used the presumption of prudence precedent adopted by most courts and found participants did not allege facts sufficient to overcome this presumption. The participants argued there were various dates on which State Street should have acted to divest the retirement plan’s holdings in GM stock prior to the time it actually did, but in each instance, the court found State Street had presented evidence in support of its stance.

According to the court opinion, on August 1, 2008, GM announced a third quarter 2008 net loss of $15.5 billion. Analysts projected that GM was on track to run out of cash by the first quarter of 2009. In its November 10, 2008, Form 10-Q filing for the third quarter of 2008, GM acknowledged that its auditors had “substantial doubt” regarding GM’s “ability to continue as a going concern.” In a November 2, 2008, notice to participants and beneficiaries, State Street temporarily suspended the purchases of the GM Common Stock Fund until further notice, noting that “it is not appropriate at this time to allow additional investments by participants.” It was not until March 31, 2009, that State Street decided to divest the GM stock held in the fund, with the process completed by April 24, 2009.

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U.S. District Judge Denise Page Hood previously dismissed the lawsuit, finding that since participants could allocate their investments among a range of investment options, and since they knew GM was in financial trouble but continued to invest in GM stock, State Street cannot be held liable for the participants’ investment choices (see “State Street Stock Drop Suit Gets Tossed”). However, on appeal, the 6th U.S. Circuit Court of Appeals, held that the participants pleaded sufficient facts to make plausible their claim of a causal link between State Street’s conduct and the losses to the plan and that State Street cannot escape its duty simply by asserting at the pleadings stage that the plaintiffs (i.e., participants) themselves caused the losses to the plans by choosing to invest in the GM stock fund.

The plaintiffs in the case assert it was imprudent for State Street to continue to hold GM stock in the plans as of July 15, 2008, when GM’s then-CEO announced GM intended to implement a comprehensive restructuring plan in response to second quarter 2008 losses which he described as “significant,” and to stem “an impending liquidity crisis at GM.” The 6th Circuit noted that the plaintiffs need not ultimately prove that July 15, 2008, was the actual date on which it was no longer reasonable to continue holding GM stock, only that the “imprudent date” for investment in GM stock occurred prior to March 15, 2009.

Hood noted in her latest opinion, a fiduciary may breach its duties to plan beneficiaries by failing to investigate and evaluate the merits of its investment decisions. The presumption of prudence is not rebutted if the defendant shows evidence that the stock fluctuated during a certain period and that several investment advisers recommended holding the stock. A fiduciary breaches its duty if it fails to impartially investigate the options by obtaining the impartial guidance of a disinterested outside adviser to the plan, apart from fiduciaries who also double as directors of the corporation.

For each date the participants argued would have been a more prudent time to divest the GM stock, Hood found State Street provided evidence it investigated, considered the guidance of disinterested advisers and/or showed several advisers recommended holding the stock.

In its defense, State Street argued that the notion that the Employee Retirement Income Security Act (ERISA) requires an employee stock ownership plan (ESOP) fiduciary to liquidate company stock holdings based on a company’s financial difficulties has been soundly rejected in comparable stock drop cases, citing DiFelice v. U.S. Airways, Inc.

In addition, State Street said it discharged its fiduciary responsibilities through a three-tier decision making process, and noted that courts who have reviewed its process have concluded it satisfies ERISA’s requirements, and that State Street fulfilled all of its obligations and understood its fiduciary duties, citing In re Delphi Corp. (see “Delphi Fiduciary Breach Suits Dismissed Against State Street”).

“Although Plaintiffs make light of State Street’s ‘procedural process’ in reviewing the status of GM stock, the evidence submitted, including the number of meetings the Independent Fiduciary Committee held during the Class Period shows that State Street was prudent and deliberate in its decisionmaking,” Hood concluded.

In December 2012, the U.S. Supreme Court declined to review the State Street case regarding GM stock (see “GM Participants Can Move Forward with State Street Suit”). However, the high court has since taken on another case concerning the presumption of prudence, and many of the same points made in Hood’s recent decision were discussed in the arguments before the Supreme Court (see “High Court Ponders ‘Conflicts’ for ESOP Fiduciaries”).

The recent decision in Pfeil v. State Street Bank and Trust Company is here.

Compliance April 18, 2014

DOL Fee Guide Proposal Misses the Point, Some Say

Value, not just cost, is what plan sponsors and participants should see when reviewing fee disclosures, some contend.
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A summary approach to fee disclosures would be very helpful to plan sponsors, says Kevin Watt, senior vice president of Security Benefit’s defined contribution group. “The first round of 408(b)(2) needed some guidance,” he tells PLANADVISER. “We realized plan sponsors received disclosures from covered service providers from multiple places: third-party administrators, advisers, recordkeepers and other parties.”

In March, the Department of Labor (DOL) issued a call for comments about a proposal to include a guide or summary with the disclosures to plan sponsors. Phyllis Borzi, assistant secretary of labor for the DOL’s employee benefits security administration said the agency did not intend for providers to offer a master list of services and fees and have plan sponsors figure out which services they are using and paying for (see “A Conversation with the DOL”). The proposal calls for a summary that would streamline the disclosures to avoid length and complexity, or a guide to help plan sponsors know where to find specific fee data in the disclosures.

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The disclosures plan sponsors received were fragmented, and the summary guide is a good idea, Watt says. “It would help plan sponsors understand who is working on their plans.”

But so far, Watt says, “the outcome of fee disclosure has been lopsided.” The 408(b)2 regulations show only half the story—the disclosures put the emphasis on costs and omit any discussion of value for that cost.  If the proposal is adopted, plan sponsors will want to ask providers to specify the role they play and what services they give.

“Plan sponsors, particularly small ones, are somewhat confused about what services are offered and the actual services being provided,” Watt says. A recordkeeper should state in plain language the services included for a sponsor’s plan, such as maintaining participant accounts on the website, keeping track of participant records and vesting schedules.

Adding the services and value would be an opportunity for both plan sponsors and for providers, Watt says. It would be an opportunity for plan sponsors to gain a better understanding of what they get, and covered service providers would have an opportunity to explain why the fees are there, and what services they provide to support the retirement plan.

It is a misconception that people pay attention to fees alone without considering value, James Sampson, managing principal of Cornerstone Retirement Advisors, tells PLANADVISER. “Fees are only high in the absence of value,” he says. Taking value out of the equation is a mistake. After all, Sampson says, “you don’t go into a restaurant and ignore the left side of the menu. [You ask] 'What do I want to eat'—not, what does it cost?”

Leaving out this evaluation for the plan sponsor on a one-page summary for 408(b)(2) is useless; equally important as disclosing fees is disclosing their value, he contends. Sampson also points out that a small-company plan sponsor without a committee, or employers that manage the 401(k) in-house may be at a disadvantage. They may not be able to handle a summary sheet on top of the full disclosure to the same extent as a plan that has an engaged committee or a plan with an active adviser, he says.

Sampson feels components of 408(b)2 provider fee disclosures to plan sponsors are not nearly as broken as 404(a)(5) plan sponsor fee disclosures to participants. “If we’re just looking at the cost and benefits of a participant statement, we have an exorbitant cost for zero benefit because no one reads them,” he says.

“The participant notices absolutely need to be revamped,” he says. “What sticks out to me is that 404(a)(5) should be a one-page summary, because the employee really doesn’t have a whole lot of impact on their account.”

Streamlining 408(b)(2) is going after the wrong piece of the puzzle, Sampson states. The DOL should be focusing on the disclosures to participants. “You can’t give an employee a 10-page disclosure and expect them to understand it,” he says. “If we do all these things at the plan level and the participant never reads it, why are we doing it?” The end result is dysfunction, he says.

Watt agrees there needs to be more clarity for participants about the fees they pay. He feels giving fee disclosures to participants is a great idea, but it doesn’t provide an opportunity to show participants the value of what they receive. “There needs to be more balance around plan sponsors, who are trying to provide a benefit to their employees, showing the value,” he says. “The disclosures don’t explain investment return. If you focus just on cost without looking at return or value, it’s a one-sided view.”

There’s no way to know if outlining the value and services participants receive for their costs will ever be accomplished, Watt says, but he suggests it as a best practice for providers. “Make it easy to understand,” he says, “but also show the value.”

The proposed regulation really addresses just plan sponsors, Watt says. The participant notices need to be more summarized than they are. Looking at the progression of fee disclosures from 2012, he says, “I think we’ll continue to improve on that idea and really take it to a balanced approach, balancing the value for the cost you’re paying.”

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