Compliance March 19, 2010

Court Dismisses Most Claims in State Street Stock Suit

A federal court has dismissed most claims against State Street Corporation and its retirement plan fiduciaries regarding the offering of company stock as an investment in its employee stock ownership plan.
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Noting that it was difficult for the court to determine whether Thomas U. Kenney’s claim of imprudence is viable because conduits are complex, non-transparent investment vehicles, still the U.S. District Court for the District of Massachusetts dismissed the claim, saying Kenney failed to allege sufficient facts to demonstrate that it was imprudent to invest in State Street stock because of the riskiness of these portfolio and conduit assets during the class period. “Conclusory allegations of riskiness will not suffice,” the court said.     

The court also found State Street actually met optimistic statements of performance made in some Securities and Exchange Commission (SEC) filings, and that its filings contained disclosures about the risks of the conduits, so it dismissed most of the negligent misrepresentation and non-disclosure claims. However, the court moved forward the claim that the company breached its fiduciary duties by issuing an October 2008 SEC filing and press release in which it indicated that its investment portfolio and conduit program “remained high.” The court said a plan beneficiary could reasonably have read this SEC filing and press release as assurance that the company did not foresee there would be significant losses in the future.     

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Because the remaining claims for mismanagement of plan assets, divided loyalty, and failure of State Street properly to appoint, monitor, and inform the remaining defendants contain conclusory claims and derive substantially from plaintiff’s imprudence claim, the court dismissed them.     

Kenney alleged that State Street Corporation, the Benefits and Investment Committees of its Board of Directors, and the individual members thereof negligently misrepresented and failed to disclose critical aspects of State Street’s financial condition during a class period running from January 3, 2008, to January 20, 2009. During that time, defendants allegedly exposed the company to more than $9 billion in potential losses through high-risk assets held in its investment portfolio and four asset-backed commercial paper conduits, which led to a massive decline in State Street’s stock value.      

The case is Kenney v. State Street Corp., D. Mass., No. 09-CV-10750-PBS, 3/15/10.

Compliance March 19, 2010

Auto-Enrollment Produces Greater Benefit for Young, Low-Income Workers

Research from the Employee Benefit Research Institute (EBRI) found that automatic enrollment of participants in 401(k) plans is likely to be most beneficial to young and low-income workers, although high-income workers are likely to benefit from it as well.
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“The Impact of Automatic Enrollment in 401(k) Plans on Future Retirement Accumulations: A Simulation Study Based on Plan Design Modifications of Large Plan Sponsors,” in the April 2010 EBRI Issue Brief, is an expansion of earlier results released in January, which found that large employers adopting automatic enrollment in their 401(k) plans have generally increased the employer match to participant’s accounts—in some cases, by a significant amount (see “Study Finds Link between Auto-enrollment, Higher Match in Large Plans”).    

The analysis found that under baseline assumptions, the median 401(k) accumulations for the lowest-income quartile of workers currently age 25 to 29 (assuming all 401(k) plans were voluntary enrollment plans as typified by the 225 large plan sponsors described above) would only be 0.08 times final earnings at age 65. However, if all 401(k) plans are assumed to be using the large plan sponsor auto-enrollment provisions, the median 401(k) accumulations for the lowest-income quartile jumps to 4.96 times final earnings (if 401(k) participants revert back to the default contribution when they change jobs) and 5.33 times final earnings (if they retain their previous contribution level when they change jobs).     

There are also large increases even for high-income workers: The multiple under a voluntary enrollment scenario is 2.41 times final earnings compared with 9.15 or 9.81 under auto-enrollment, depending on the assumptions for employee reversion to default contribution rates upon job change.     

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This EBRI study analyzed plan-specific data of 1,000 large defined contribution plans for salaried employees from Benefit SpecSelect (Hewitt Associates LLC) in 2005 and 2009 to compare a subsample of plan sponsors that did not have auto-enrollment in 2005 but had adopted it by 2009.     

The study is available at www.ebri.org.

 

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