The team at JMM CPA has introduced a new approach to auditing
retirement plans, designed to drive efficiency and quality into the
process.
The new approach to auditing a retirement plan is to
perform testing on a quarterly basis. The records needed from the plan
sponsor are readily available and efficient to obtain. The data needed
from the plan recordkeeper is typically available to JMM CPA online with
no time or effort required of the plan sponsor.
There are several benefits embedded in this approach for the plan sponsor.
Efficiency
– Data needed to perform tests of transactions that occurred during the
most recent quarter is readily available and fresh in the minds of the
parties involved;
Quality – It is not unusual to discover issues
or errors that need to be corrected during a plan audit. When such
matters are detected during a plan year they can also, most likely, be
corrected prior to plan year end; and
Timeliness – Fourth
quarter testing can be completed shortly after plan year end. This
allows plan sponsors to file the Form 5500 well before the July deadline
and return their focus to the needs of their business.
JMM
CPA is a member of the AICPA Employee Benefit Plan Audit Quality Center
and enjoys helping plan sponsors maintain their employee benefit plans
in compliance with the rules and regulations.
For more information about this approach to auditing benefit plans, email james.moyna@jmoynacpa.com or call at 847.682.3696.
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American Airlines DC Plan Affiliated Funds Suit Moves Forward
The plaintiffs claim the defendants breached their fiduciary duties
because a prudent fiduciary would not retain the American Beacon Funds, which were created by American Airlines' parent company,
because they were more expensive than similar alternatives.
A federal district court judge has
denied most motions to dismiss filed by American Airlines in a case
accusing the firm of including affiliated funds in its retirement plan
investment lineup though they were more expensive and lower-performing
than other funds.
The core of the
plaintiffs’ claims relate to the use of American Beacon Funds in the
plan. AMR Corp., American Airlines’ parent company, created a line of
mutual funds that were managed by another subsidiary of AMR Corp. This
fund manager was later renamed American Beacon Advisors, Inc. in 2005.
These mutual funds were then known as American Beacon Funds.
According to the court opinion,
AMR Corp. sold American Beacon Advisors, Inc. in 2008 to Lighthouse
Holdings, Inc. As a part of this deal, AMR Corp. received an equity
stake in Lighthouse Holdings, Inc. Plaintiffs contend that this sale was
premised on American Airlines’ continued use of American Beacon Funds
in the plan. Although American Airlines employed an independent third
party to approve the continued use of American Beacon Funds in the Plan,
Plaintiffs allege that this was done merely to “whitewash” American
Airlines’ actions.
Plaintiffs claim that the defendants breached
their fiduciary duties because a prudent fiduciary would not retain the
American Beacon Funds because they were more expensive than similar
alternatives; American Beacon Funds underperformed compared to other
similar investments; and American Beacon Funds were not included in
other 401(k) plans. Plaintiffs also allege that defendants breached
their duty of loyalty by not removing the overly expensive and
underperforming American Beacon Funds.
In 2015, Lighthouse
Holdings, Inc. sold its interest in American Beacon Advisors, Inc.
According to the plaintiffs, this eliminated any financial interest
American Airlines had in the plan’s use of American Beacon Funds. Then,
later in 2015, the plan’s fiduciaries removed the American Beacon Funds.
And shortly thereafter, the American Beacon Funds ceased to exist
because, according to plaintiffs, they were marketplace failures that
prudent investors would not choose.
Defendants American Airlines
Inc., the Pension Asset Administration Committee, the Benefits Strategy
Committee (BSC), the Pension Benefits Administration Committee (PBAC),
and the Employee Benefits Committee filed a motion seeking to have all
of plaintiffs’ claims dismissed.
NEXT: The opinion
The defendants argue that the
plaintiffs have failed to set forth a valid theory of disloyalty because
an independent third party reviewed and approved the continued use of
American Beacon Funds after American Beacon Advisors was sold to
Lighthouse Holdings, Inc.; Department of Labor regulations allow plan
investments managed by the plan sponsor itself; and the plan did not
include all American Beacon Funds and, in fact, not all American Beacon
Funds were sold after Lighthouse Holdings, Inc. sold American Beacon
Advisors.
U.S. District Judge Reed O’Conner noted that the
plaintiffs do factually allege that the independent fiduciary was not
involved after the sale of American Beacon Advisors to Lighthouse
Holdings, Inc., and so, even if the independent third party did conduct a
faithful assessment, the plaintiffs’ allegations that defendants
continued to retain American Beacon Funds after the sale was complete
cannot be mitigated by the use of an independent fiduciary at the time
of American Beacon Advisor’s sale. “In other words, Plaintiffs argue
Defendants would have breached their duty of loyalty by retaining
American Beacon Funds after the American Beacon Advisors sale was
complete and after the independent fiduciary ceased to be involved,”
O’Conner wrote. “To say at this stage in the litigation that engaging a
third party fiduciary establishes that Defendants acted loyally during
the entire period of time that Plaintiffs complain of would require the
Court to draw an impermissible inference against Plaintiffs.
Accordingly, the Court does not find that dismissal is warranted on this
basis at this time.”
O’Conner conceded that Department of Labor
regulations allowed investments in plans that are managed by the plan
sponsor. However, he noted that is not the whole of the plaintiffs’
allegations. Plaintiffs allege not only that the defendants chose
affiliated investment options but also that those investment options
either charged higher fees than similar options or that those options
were underperforming and that the defendants failed to investigate the
availability of cheaper alternatives. Taking these allegations as a
whole, O’Conner denied dismissal on this basis.
Lastly, the
defendants argue that American Beacon Funds were included in the plan on
their merits, and they offer an alternative explanation for why the
plan dropped the American Beacon Funds after Lighthouse Holdings, Inc.
sold American Beacon Advisors. But, O’Conner said that agreeing with the
defendants would require the court to draw inferences against the
plaintiffs which is not permitted at this stage in the legal
proceedings, so it denied dismissal on this basis.
NEXT: Most claims are plausible
O’Conner addressed the allegation
that the defendants were imprudent by including American Beacon index
funds that were more expensive than nearly identical index fund
alternatives. For example, the plaintiffs allege that the plan included
American Beacon S&P 500 Index Fund, which charged fees seven times
higher than an identical Vanguard fund. The defendants argue that they
had no duty to seek out the cheapest possible index funds. Defendants
cite the 7th U.S. Circuit Court of Appeals decision in Hecker v. Deere
& Co. as well as the 8th U.S. Circuit Court of Appeals decision in
Braden v. Wal-Mart Stores, Inc., for this proposition. But, according to
O’Conner, in applying Braden, courts have denied motions to dismiss
where plaintiffs alleged that the defendants failed to consider lower
cost funds with identical styles and stocks. He found that while drawing
all reasonable inferences in favor of the plaintiffs, they have
plausibly stated a claim.
The plaintiffs also allege the
defendants were imprudent by retaining poor-performing actively managed
funds, specifically the American Beacon Short-Term Bond Fund, the
American Beacon Large-Cap Growth Fund, and the American Beacon Treasury
Inflation Protected Securities Fund. The defendants rely on a number of
materials outside the pleadings to argue why the inclusion of these
three funds was not imprudent. O’Conner said, while the Court may take
judicial notice of those materials, it may not rely on the parties’
opinion about what the proper inferences should be drawn from them, so
he found that dismissal is not warranted at this time.
One point
on which O’Conner agreed with the defendants regarded the plaintiffs'
argument that the defendants breached their duty of prudence by failing
to consider low-cost separate accounts and collective trusts as
alternatives to mutual funds. O’Conner cited a 7th Circuit case in which
it held that offering mutual funds instead of other lower cost
alternatives is not imprudent, and agreed with its reasoning.
“Accordingly, Defendants’ Motion is granted to the extent that Count I
relies on the argument that Defendants breached their duty of prudence
by not considering alternatives to mutual funds,” he wrote.
Finally,
the defendants argued that Count I of the complaint should at least be
dismissed as to American Airlines, the PBAC, and the BSC because they
were not fiduciaries. However, O’Conner rejected this argument, saying
the plaintiffs have alleged that these defendants were either named
fiduciaries or had control over management of the plan.