ERISA Breach Case Hinges on SunEdison Company Stock

A former SunEdison employee is suing the company, a raft of its directors and State Street Bank for continuing to offer SunEdison stock in the retirement plan.

Alexander Y. Usenko, a former SunEdison employee and participant in the company’s defined contribution (DC) plan, has brought suit against SunEdison for losses incurred by investing his retirement plan assets in SunEdison stock.

Usenko has named as defendants SunEdison Inc., its board of directors, the company’s investment committee, State Street Bank & Trust Co., and SunEdison’s chief executive (Ahmad R. Chatila) and senior executives and members of the operating committee: Emmanuel T. Hernandez, Antonio R. Alvarez, Peter Blackmore, Clayton C. Daley, Jr., Georganne C. Proctor, Steven V. Tesoriere, James B. Williams, Randy H. Zwirn, Matthew Herzberg). One defendant is identified only as John Doe.

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The notion of company stock as a potential liability in a retirement plan is cropping up more frequently, with plan sponsors backing off company-issued stock as a plan investment. Some say it can still be offered, as long as there is a prudent, documentable process in place.  

According to the complaint, the defendants permitted the plan to continue offering SunEdison stock as an investment option to retirement plan participants, even after they knew or should have known that during the time frame (August 6, 2015 to the present) the stock had a number of troubling issues. It was artificially inflated; SunEdison—which bills itself as the world’s largest global renewable energy development company—was in extremely poor financial condition; and SunEdison faced equally poor long-term prospects.

These factors made SunEdison stock an imprudent retirement investment for the plan, the complaint says. As fiduciaries of the plan, the defendants were empowered to remove SunEdison stock from the plan’s investment options but didn’t. Neither did they act in any way to protect the interests of the plan or its participants, in violation of their legal obligations under the Employee Retirement Income Security Act (ERISA).

NEXT: A breach of the “prudent man” standard

The complaint says that the value of SunEdison shares in Usenko’s account diminished as a result of the defendants’ breaches of duty. According to the complaint, Usenko is no different than the thousands of other SunEdison employees who entrusted their retirement savings to the defendants/fiduciaries of the plan.

According to the complaint, the inclusion of the stock amounts to a breach of the “prudent man” standard under ERISA. The defendants breached the duties they owed to the plan, to Usenko, and to the proposed class members who are also participants by, among other things, retaining SunEdison common stock as an investment option in the plan. A reasonable fiduciary using the “care, skill, prudence, and diligence that a prudent man acting in a like capacity and familiar with such matters would use,” as required by ERISA, would have done otherwise.

Usenko is seeking a jury trial; the complaint states that once discovery begins, it’s likely that additional people or entities engaged in wrongdoing will be revealed, and that more instances of wrongdoing will be uncovered. In that case, Usenko will seek to amend the complaint, adding new parties or new claims (or both).

The complaint cites the Supreme Court’s decision regarding Fifth Third Bancorp v. Dudenhoeffer as a precedent, in which plan participants challenged the plan fiduciaries for failing to remove company stock as a plan investment option. The plan’s fiduciaries were found to have violated ERISA when they continued offering an imprudent plan investment option—and the U.S. District Court considers this case similar to Fifth Third.

NEXT: No presumption of prudence 

The gist of the allegations of breach of the duty of prudence and breach of the duty of loyalty is that the defendants allowed the company stock to continue as a plan investment during the period specified in the complaint—despite knowing that the investment was imprudent as a retirement vehicle. The complaint says defendants certainly should have known it was unsuitable by the beginning of that specified period.

According to the complaint, SunEdison stock was artificially inflated during the period specified in the suit, while the plan was making purchases. Second, the company materially misrepresented the strength of its financial condition and prospects, thereby inflating the stock’s value. As a result, SunEdison stock, and subsequently the plan’s assets invested in it, lost substantial value once the truth emerged.

This claim—that a company’s stock is imprudent based on the stock price being artificially inflated, and that the fiduciaries should have understood the overvaluation because of nonpublic information of which they were aware—is squarely endorsed by Fifth Third.

Second, the lawsuit claims the company was also an imprudent choice during the specified period in light of circumstances demonstrating SunEdison’s perilous financial condition, which included a sea-change in the basic risk profile and business prospects of SunEdison.

The suit suggests several factors—SunEdison’s overwhelming and unserviceable debt and high debt management risk, and the defendants’ failure to properly investigate the continued prudence of SunEdison Stock and/or employ a reasoned decision-making process in evaluating company stock—all represent the kind of “special circumstances” that the Supreme Court recognized in Fifth Third.

The case was filed in U.S. District Court for the Eastern District of Missouri. The text of the complaint is here.

Pension Funding Picture Still Tough for 2016

Market volatility, longevity and PBGC premiums are prompting sponsors to take a harder look at funding levels.

Expectations that the stock market will continue to be volatile, combined with the effect of new mortality tables and an increase in the premiums that the Pension Benefit Guaranty Corporation (PBGC) charges sponsors of defined benefit (DB) plans, are together prompting sponsors to take an even more careful look at the funding levels of their pensions, experts say.

The pension funding status of the nation’s largest corporate plan sponsors finished the year at 82%, unchanged from the end of 2014, due in large part to a rise in interest rates offset by a weak global stock market, according to Willis Towers Watson. With the Dow Jones Average falling by 1,648 points in the first three weeks of 2016, the funding status would probably be lower at this point, says Alan Glickstein, senior retirement consultant at Willis Towers Watson, based out of Dallas. “If we were measuring pensions now instead of December 31, the picture would be more dismal,” he notes.

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Furthermore, because the Internal Revenue Service (IRS) allows DB plans to discount future benefit payments to a present value using a 25-year average of bond rates rather than a two-year average, this could potentially be inflating the funding status for some plans, Glickstein says.

“Very few plans are 100% funded,” says Marc Lieberman, chairman of the public pensions/alternative investments group at Kutak Rock LLP in Scottsdale, Arizona. “There are plans with funding levels as low as 7%, but I would say most plans are in the 60% to 80% range.”

For corporate plans that are funded 80% or less, “getting their funding ratio up is an important goal,” says David Godofsky, head of the employee benefits and executive compensation group and a partner at Alston & Bird in Washington, D.C. Additionally, there are “a lot of government plans that are poorly funded, even as low as 30% or 20%.”

NEXT: The first step to improve funding

The best way to improve the funding status of a pension plan is to put more cash into the plan, “and to do that in a way that meets the goals of your corporate objectives,” says Ari Jacobs, global retirement solutions leader at Aon Hewitt in New York.

Brad Smith, partner and pension consultant at NEPC, an investment consulting firm with $560 billion in corporate pension assets under advisement, based in Atlanta, concurs: “We’ve had some very good market returns over the past three to five years. Through the end of 2015, the S&P 500 was up 15%. We do not expect those returns going forward. We really believe we are in a low-return environment, and in that scenario, the best thing a plan sponsor can do is to put more money into the program.”

With the discount rate change which amended the Pension Protection Act (PPA), the minimum funding requirements for pension plans is lowered, says Pierre Couture, head of customized solutions for multi-asset strategies and solutions at Voya Investment Management in New York. “To better fund their plan, sponsors need to contribute more than the minimum required because the average makes them appear better funded,” he says.

Another option available for plans that are not frozen is to “reduce the accrual of future benefits,” Godofsky says. There are pensions that offer “rich provisions for members [and therefore] have lower funding levels,” Lieberman concurs. “This is very popular among municipalities and states, and it might be done by adjusting future cost of living standards.” Along these lines, sponsors could also increase participants’ contributions, although this is more common among public plans than it is corporate plans, Godofsky says.

NEXT: Borrowing

Some pension sponsors are borrowing to fund their plan, “which makes sense because interest rates are still low and it reduces the PBGC premium” on funding shortfalls, Couture notes. “Plus, the contributions and the loan are tax deductible.”

Public plans also have the option of issuing pension contribution bonds, Godofsky says. “That means you have traded future contributions into your pension plan for future payments on the bonds,” he says. However, there are risks to this strategy. “If you think your pension fund will earn a higher rate of return than the interest rate on the bonds, you come out ahead of the game. But if it doesn’t, then you have to pay the cost of servicing the bonds and make higher contributions to your defined benefit plan because the value decreased.”

Before a sponsor takes out a loan to fund their plan, they need to take a broader look at their overall use of cash, Glickstein says. “You have to look at the overall picture of the company and how many covenants they have on how many loans,” he says.

Of course, changing the investment strategy is an option at sponsors’ disposal. Lieberman believes that an increasing trend among plan sponsors might be to reduce their equity exposure through a risk-adjusted portfolio. “One well-managed plan has intentionally reduced their return because they want to reduce the risk of their entire portfolio,” he says. “They have intentionally designed their plan to do less well when equities rise and better when equities fall. They might earn 1% to 2% less than their peers when equities are booming, but when they are falling and their peers lose 20%, they might lose only 2%. Everybody in the field is cognizant that they have to reduce the volatility. These plans cannot bear these wild swings in their valuations.”

In addition, plans are increasingly interested in reducing their pension liabilities and improving the funded ratio by either paying lump sums to participants or purchasing group annuities and then adjusting the portfolios potential for income that matches pension liabilities, Couture says. Overall, he says, “With the help of their consultants, pension plan sponsors have done a good job of creating a glide path to reduce risk.”

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