Parties Propose Settlement on Eve of Eaton Vance ERISA Hearing

The lawsuit accuses Eaton Vance defendants of unlawful self-dealing with respect to a company retirement plan, in violation of ERISA and to the detriment of participants and beneficiaries.

A motion filed in the U.S. District Court for the District of Massachusetts could bring to a close a class action Employee Retirement Income Security Act (ERISA) self-dealing lawsuit filed by participants in an Eaton Vance retirement plan.

The joint motion requests the judge in the case stay further proceedings—including a hearing scheduled for today, March 25. According to the motion, lead plaintiff Shannon Price, individually and on behalf of the class and the plan, has agreed to a proposed settlement, as have defendants Eaton Vance Corporation, Eaton Vance Management, the Eaton Vance Investment Committee, and some 30 individual defendants.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

Today’s hearing would have addressed the defendants’ motion to dismiss for failure to state a claim regarding counts VII, VIII, and IX of the complaint.

In support of the stay motion, the parties state they have reached an agreement in principle to settle this action on a class-wide basis. Further, according to the motion, the parties will “work diligently to prepare and submit a motion for preliminary approval of the anticipated class settlement.”

“In the event that the parties are unable to reach a final agreement to settle this action, they will promptly notify the court,” the motion states. “The parties request that the court vacate the date now on the calendar for the March 25, 2019, hearing on motion to dismiss for failure to state a claim counts VII, VIII, and IX of the complaint, and stay further proceedings in this action pending the parties’ submission of a motion for preliminary approval of the anticipated class settlement. The parties anticipate that they will be in a position to make that submission to the Court within 45 days.”

The text of the lawsuit alleges that Eaton Vance “used the entire plan as a test laboratory and vehicle for self-gain.”

“Instead of leveraging its investment expertise to select prudent investment options on the open market, Eaton Vance filled the plan with funds that Eaton Vance managed,” the compliant states. “Of the 42 non-money market investments strategies on the plan, 35 were managed by one of the Eaton Vance defendants. Moreover, Eaton Vance proprietary funds were the exclusive actively managed investment strategies available on the plan. As of December 31, 2016, the Plan had $434,848,484 in assets under management, approximately 80% of which were invested in Eaton Vance funds.”

The details of the settlement will be made available when the parties file their formal settlement motion with the court, in about a month and a half. In the meantime, context for this settlement decision can be found in the recently filed settlement agreement struck in a similar case by BB&T. Apart from tens of millions of dollars in monetary compensation, the employer in that case agreed to “significant future relief in terms of scope and duration while also securing additional commitments for participants’ benefit.” In particular, the fiduciaries agreed to engage a consulting firm to conduct a request for proposal for investment consulting firms that are unaffiliated with BB&T and engage an investment consultant to provide independent consulting services to the plan. Among other matters, during the two year period following entry of the final order, BB&T will rebate to the plan participants any 12b-1 fees, sub-ta fees, or other monetary compensation that any mutual fund company pays or extends to the plan’s recordkeeper based on the plan’s investments; and if, during a two-year time period following the entry of the final order, BB&T decides to charge plan participants a periodic fee for recordkeeping services, the plan fiduciaries will conduct a request for proposal for the provision of recordkeeping and administrative services.

4Q18 Volatility Wiped Out Funding Status Gains for DB Plans

Pension plans’ funding rose a mere 70 basis points last year, according to Goldman Sachs Asset Management.

Despite higher interest rates and significant contributions by pension plans, their funding status rose only 70 basis points last year, according to a new report from Goldman Sachs, “2018 Pension Review ‘First Take:’ Groundhog Day.”

While some plans notably increased fixed-income allocations, likely linked to significant contribution activity and the intra-year rise in funded levels last year, other pension plans may not have been able to act before the volatility of the fourth quarter erased gains. Goldman Sachs’ report, written by Senior Pension Strategist Mike Moran, says, “In some ways, it feels like the 1993 movie ‘Groundhog Day,’ as we relive the same scenario over and over again. For corporate pensions, that may mean seeing funded levels rise, missing the opportunity to lock in those gains, and then watching those gains dissipate, especially in light of an aging bull market and expectations of a potential slowdown.”

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

Goldman’s report is based on the 50 largest pension plans in the S&P 500. These companies’ funding levels rose during 2018 to their highest level since the 2008 financial crisis, but gave back most of their increases in the fourth quarter. “This is, unfortunately, a scenario that has played out before for U.S. corporate defined benefit [DB] plans and is contributing to a sense of déjà vu.”

Allocations to fixed income rose to 48% by the end of 2018, the highest level Goldman Sachs has ever tracked in DB plans. In 2017 and 2018, the majority of DB plans were cash flow negative, meaning that some of their contributions were used to fund benefit payments and never made their way into asset allocations. Furthermore, Goldman Sachs says, another reason why allocations to fixed income rose last year could well have been because pension plans withdrew allocations from other asset classes in order to pay benefits.

“Also, recall that the end of 2018 was quite volatile,” Goldman’s report says. “The S&P 500 lost around 9% in December, while fixed income had low single digit returns as interest rates fell. Some plans may not have been able to effectuate rebalancing actions before the end of the year, resulting in higher fixed-income allocations than anticipated.”

Over the past 10 years, there have been times when pension plans could have de-risked through better asset liability matching but some did not, Goldman Sachs says, resulting in many plans having to repeat their contributions. By the end of 2017, plans were collectively underfunded by $245 billion for a funded ratio of 86%.

For 2019, Goldman Sachs expects fixed-income allocations to rise and it recommends that pension plans take a “more customized approach in managing these assets,” the report says. “Unless the fixed-income allocation is tailored to the actual liability profile of the plan, the hedging assets may not perform as contemplated and funded status may decline unexpectedly.” To accomplish this, Goldman Sachs recommends that pension plans hire a strategic partner to use overlays and derivatives to fine tune hedges and position the portfolio for an annuitization in-kind transfer.

Goldman Sachs also notes that pensions are increasingly turning to outsourced chief investment officer (OCIO) services and that this movement could help them improve their funded status.

Goldman Sachs’ full report can be downloaded here.

«