Compliance January 13, 2014

Regions Financial to Settle Stock Drop Suit

Regions Financial Corporation has agreed to settle a lawsuit relating to its offering of company stock and certain Morgan Keegan funds in its retirement plan.
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A motion for preliminary approval was issued in December 2013 by the U.S. District Court for the Western District of Tennessee, for the settlement of In re Regions Morgan Keegan Securities, Derivative and ERISA Litigation. The defendants will pay a total settlement amount of $22.5 million, which will divided among four different settlement subclass groups, according to the court document. The document also mentions the scope of release, detailing in what circumstances that the defendants are released from all ERISA-based claims.

The court document mentions that “the complexity of this case sets it apart from many ERISA breach of fiduciary duty class actions because the plaintiffs assert three distinct categories of claims arising from Regions’ own 401(k) plans for its employees and also assert one of those categories of claims on behalf of other ERISA-covered employee benefit plans that contracted with Regions for trustee, custodial, investment management and investment adviser services.” Thus, the four settlement subclass groups.

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The original lawsuit, filed in 2008 against Regions and its subsidiaries, alleges the defendants violated their fiduciary duties under the Employee Retirement Income Security Act (ERISA) by continuing to keep retirement plan assets invested in company stock after it was no longer prudent to do so (see “Law Firm Probing Memphis Investment Bank 401(k) over Stock Drop”). It also questions whether plan fiduciaries knew or should have known that Regions and/or its subsidiary Morgan Keegan were not properly disclosing their large exposure to Collateralized Debt Obligations and subprime mortgages, which caused losses to Regions’ common stock and Morgan Keegan’s mutual funds.

The full text of the motion for settlement can be found here.

Data & Research January 13, 2014

TDFs Under Microscope as Plan Sponsors Focus on Fees

From a fiduciary perspective, defined contribution (DC) plan sponsors largely focused their time on fees and compliance in 2013, according to data from Callan.
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Callan’s 2014 DC Trends Survey found plan sponsors reviewed plan fees, ensured compliance with Department of Labor (DOL) disclosure requirements, updated their investment policy statements and reviewed compliance with Employee Retirement Income Security Act Section 404(c).

Lori Lucas, CFA, Callan’s Defined Contribution Practice Leader, tells PLANSPONSOR it was a little surprising how much activity is happening in DC plans for target-date funds (TDFs). “We’ve seen an increase in searches, so I was expecting a little increase in activity, but we found it to be substantial; more than one-third [of respondents] said they were planning to change [target-date] funds or managers,” she says.

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According to the survey findings, the increased activity may be, in part, due to the release of DOL tips for TDFs in 2013 (see “EBSA Offers Tips for Selecting TDFs”). Lucas notes that the survey found 11.5% of DC plan sponsors used custom target-date funds in 2013, and 13.6% say they will do so in 2014. She points out that the DOL requested specifically that plan sponsors look at whether non-proprietary funds were right for their plans.

However, according to Lucas, also noteworthy in the survey findings was the increase in the use of indexed funds within TDFs, actively managed funds make up less than 30% of TDFs used plan sponsors now. Lucas says this is primarily driven by fees.

The survey found a similar trend of the increase in the use of indexed funds within plans’ core investment lineups, she adds. The percentage of plan sponsors that offer an active/passive mirror (i.e., where major asset classes are represented by both active and passive funds) jumped from 12% in 2012 to 21% in 2013. In 2014, 24% of plan sponsors aim to increase the proportion of passive funds in their DC plan lineup.

“There is still a lot of work to be done,” says Lucas. “The work started in 2012 is still going on; plan sponsors are still working on reducing fees and looking at ways to pay fees differently—for example, we are seeing more bundling of services. But, the process takes time and it will continue to transform plans in many ways, not only affecting funds, but services.”

The survey found plan fees are facing downward pressure in other ways. Compared to previous years, in 2013 more plan sponsors knew the proportion of funds in their plans that pay revenue sharing (2.6% did not know in 2013 versus 6.8% in 2012), whether the plan has an expense reimbursement account (no plan sponsors did not know in 2013 compared to 12% in 2012) and how revenue sharing is disclosed to plan participants (“don’t know” responses declined from 17.8% in 2012 to 2.9% in 2013). Plans that offer potentially lower-cost separate accounts (50.6% in 2013 vs. 42.5% in 2012) and collective trust investment vehicles (51.9% vs. 48.3%) increased, while the use of mutual funds decreased (85.2% vs. 92%).

Callan fielded the 2014 DC Trends Survey in the fall of 2013. Most of the 107 respondents were from large and mega 401(k) plans, but there was a notable representation from governmental and other nonprofit plan sponsors.

The survey report is only available to Callan clients.

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