Dissecting a ‘Historically Tight’ Labor Market

New capital markets research from Wilmington Trust assesses a trend seen in the global economy, where the number of job openings far outpaces the number of available workers, causing supply chain disruptions and elevating the importance of compensation and employee benefits. 

Wilmington Trust has published a report of its annual capital markets assumptions, this year putting a spotlight on several macroeconomic trends that have been either caused by or significantly accelerated by the coronavirus pandemic.

Among these themes is the emergence of a historically tight labor market—wherein the number of job openings far outpaces the number of available workers. According to Wilmington Trust’s market experts, this trend is “badly out of sync with the overall economic cycle,” which in other ways appears very promising. As the report spells out, this severe labor market shortage, more than any other economic factor, is accounting for a massive breakdown in the normally well-oiled global supply chain.

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Consumers and economists alike can see disruptions at every node of the supply chain, from production to transportation and distribution, and these are straining businesses globally. A more subtle factor at play, the report suggests, is the way labor participation—and how firms deal with global resource disorder—will likely determine the path for inflation, which is “the critical consideration” for investors, employers and economies as a whole in 2022.

“By nearly any measure, the U.S. labor market is sending the customary signals of an economy deep in the deceleration phase,” the report explains. “Job openings are at record highs, fast food and retail outfits are offering hiring bonuses, and large corporations from retail to banking have substantially raised their minimum wages. These clear signs of labor market tightness are perhaps counterintuitive given the relative youth of the economic recovery—not yet two years young—coupled with the monumental scale of job losses during the pandemic.”

Wilmington Trust’s analysis concludes there are multiple forces impeding the return of workers and, to varying degrees, the firm expects these forces to abate in 2022 and conditions to ease. In its analysts’ view, the main drivers holding back labor force participation are accelerated retirements, broad skills mismatches, workers making serious and potentially durable lifestyle reassessments, and the lingering effects of the pandemic.

As the report explains, the labor market in an economy that is emerging from a recession or depression typically lags the economic and market recovery.

“For example, in the previous cycle, the economy bottomed out in June 2009, but the labor market kept worsening for more than six months,” the report notes. “Job losses continued until March 2010 and the unemployment rate did not decline significantly until the summer, a full year after the recession ended. [Likewise,] the unemployment rate peaks for the 1990 and 2001 recession periods came long after the recessions had ended.”

Wilmington Trust calls this “a familiar and reliable dynamic,” as employers are reticent to hire until the recovery is well-established. As such, in a “normal cycle,” it takes years for the unemployment rate to grind lower and for wage pressures to build.

It does not take a skilled economist to recognize that this cycle is different. The unemployment rate fell to 4.2% as of November, and there are reasons to believe the official unemployment rate is even understating the degree of tightness in the labor market, due to low participation. These factors imply that, not only has the labor market never been this tight, but never before has a tight labor market happened this quickly after a downturn. In hard numbers, government data shows the overall labor force is down by 2.4 million workers as of November, and much of the decline, especially for the upper age brackets, is likely permanent, according to Wilmington Trust.

“The long-anticipated retirement of Baby Boomers is a structural phenomenon, but it has been hastened by cyclical forces, including financial markets,” the report suggests. “Ironically, the rapid recovery of equity markets (and, by extension, retirement accounts) worked hand-in-hand with COVID fatigue to quicken the retirement of the largest U.S. generation. … Once financial markets recovered, retirement accelerated.”

This dynamic has created a vacuum, the report explains, and many employers are seeing mid-level employees either moving up quickly or being hired away by competitors. The vacuum is also horizontal across sectors, the report finds, with former restaurant staffers, for example, being scooped up to work in other industries, creating novel challenges for refilling positions.

“We expect markets and retirement accounts to perform well in 2022, so we do not anticipate that recent retirees will rush back in,” the report says. “But a host of factors could entice some to return, including a period of market weakness, higher wages or a realization that retirement funds will prove insufficient.”

Ultimately, with the demand for talent so far outstripping supply, and a third of U.S. workers considering a job change in the next year, employers are being forced to pay more attention than ever to their workers’ expectations and desires, as well as their emotional and physical well-being in the workplace. Together, these trends are redefining the workplace benefits market.

The full text of the Wilmington Trust report is available here.

Voya Faces ERISA Complaint Targeting Its Own Plan

Among other allegations, the plaintiffs claim Voya engaged in an imprudent process while selecting and retaining proprietary target-date funds and a stable value option.

A new Employee Retirement Income Security Act (ERISA) lawsuit has been filed in the U.S. District Court for the District of Connecticut, suggesting Voya Financial engaged in self-dealing within a retirement plan offered to its own employees.

In addition to the Voya company, multiple investment and administrative committees are named as defendants in the lawsuit, alongside some 30 “John Doe” defendants.

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The preamble of the complaint offers the following summary of the plaintiffs’ allegations, which closely resembles other lawsuits that have been filed in recent years against major U.S. financial services companies, with mixed results: “This case is about a company’s self-dealing at the expense of its own workers’ retirement savings. The defendants were required by the Employee Retirement Income Security Act of 1974 [ERISA] to act solely in the interest of the plan’s participants when making decisions with respect to selecting, removing, replacing and monitoring the plan’s investments. Rather than fulfilling these fiduciary duties, among the highest duties known to the law, by offering the plaintiffs and the other investors in the plan only prudent investment options at reasonable cost, the defendants selected for the plan and repeatedly failed to remove or replace a number of deficient proprietary retirement investment funds (Voya Funds) managed and offered by Defendant Voya Financial Inc. and/or its subsidiaries or affiliates.”

The complaint alleges these funds were not selected and retained for the plan as the result of an impartial or otherwise prudent process, but were instead selected and retained by the defendants because they benefited financially from including these options in the plan.

“By choosing and then retaining the Voya Funds as a core part of the plan’s investments to the exclusion of alternative investments available in the 401(k) plan marketplace, the defendants enriched themselves at the expense of their own employees,” the complaint alleges. “The defendants also breached their fiduciary duties by failing to consider the prudence of retaining certain other deficient investments that were inappropriate for the plan during the relevant period, and by failing to monitor the plan’s administrative fees. The defendants committed further statutory violations by engaging in conflicted transactions expressly prohibited by ERISA.”

Other self-dealing cases have been met with varied results, depending on the specific facts and circumstances and the viewpoints of the district courts and appellate judges. While some financial services firms have successfully defeated similarly structured lawsuits—for example, Morgan Stanley back in October 2019—others have either seen their summary dismissal claims rejected, or they have reached settlements.

Indeed, earlier this year, a federal district court judge moved forward a lawsuit alleging that Wells Fargo 401(k) plan fiduciaries should have been able to obtain superior investment products at a very low cost but instead chose proprietary products, for their own benefit, increasing fee revenue for the company and providing seed money to newly created Wells Fargo funds. Prior to that, a judge dismissed dueling dismissal motions in a self-dealing lawsuit targeting BlackRock. While not an outright defeat for the firm, the ruling stated there were genuine disputes of material facts that made summary judgment, whether in favor of the plaintiffs or the defense, inappropriate. That development opened up the door for a lengthy and potentially expensive discovery process, which in turn led BlackRock to settle the suit to the tune of nearly $10 million, though, like the other aforementioned providers, it admitted no wrongdoing.

In the Voya case, the plaintiffs put their focus on alleging that Voya fiduciaries engaged in an imprudent process when selecting and retaining investments, in addition to simply stating that the plan’s investments underperformed or were more expensive than other available investment options.

“While an ERISA fiduciary’s use of proprietary investment options in its employee 401(k) plan is not a breach of the duty of prudence or loyalty in and of itself, a plan fiduciary’s process for selecting and monitoring proprietary investments is subject to the same duties of loyalty and prudence that apply to the selection and monitoring of other investments,” the complaint states. “Here, the plan has an investment lineup featuring a number of underperforming investments, including a large suite of target-date funds [TDFs] managed by Voya. … The relevant investment performance and fee data pertaining to the funds challenged herein, including the Voya Funds, support a strong inference that the defendants failed to follow a prudent process in selecting and then monitoring the menu of investment options for plaintiffs and other participants who invested in the plan.”

Further along in the lawsuit, similar allegations focus on the offering of a Voya-operated stable value investment option.

“Voya does not disclose the exact amount of the spread earnings that it has made here off the backs of plaintiffs or the return on the underlying general account assets that back the Voya Stable Value Option,” the complaint alleges. “However, publicly available information indicates that not only has the spread involved here existed continuously during the relevant period, but that the amount of the spread has also been considerable—meaning that Voya has kept significantly more of the investment returns yielded by the Voya Stable Value Option than Voya has paid to plan participants invested in this fund.”

Voya says, as a matter of corporate policy, it does not comment on specific allegations in pending legal matters. “Voya believes in its plan and its process, and intends to defend the case vigorously,” a company spokesperson said in a statement.

The full text of the new Voya lawsuit is available here.

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