Compliance December 1, 2010

Former YRC Employees Denied Jury for Stock-Drop Case

A federal court denied a request for a jury trial by former employees of YRC Worldwide who are suing the company for offering company stock as a 401(k) investment option when it was no longer prudent.

Reported by

Rebecca Moore

U.S. District Judge John W. Lungstrum of the U.S. District Court for the District of Kansas noted that the Employee Retirement Income Security Act (ERISA) Section 502(a)(3) authorizes an action by a plan participant to enjoin violations of ERISA or to obtain other appropriate equitable relief. The YRC plaintiffs seek “actual damages” to be paid to the plan to restore the loss in the value of the plan’s assets resulting from defendants’ alleged breaches of their fiduciary duties (see Stock-Drop Suit Survives Initial Challenge), and argue that, because they have sought legal relief in the form of damages, they are entitled to a jury trial under the Seventh Amendment to the Constitution.

Lungstrum noted that all federal appellate courts have held that there is no right to a jury trial for ERISA claims. He also pointed out that courts have consistently characterized ERISA actions as akin to common law trust actions that are governed by common law trust principles.

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However, the plaintiffs argued that they have brought a legal claim requiring a jury trial—specifically their claim for monetary relief for breach of fiduciary duty under Section 502(a)(2)—in light of language in the Supreme Court’s opinion in Great-West Life & Annuity Insurance Co. v. Knudson. The court rejected that argument saying that Great-West “hardly governs the present situation, as it did not involve the right to a jury trial under the Seventh Amendment; it did not involve Section 502(a)(2) of ERISA; and it did not involve a claim against a trustee or fiduciary who had breached duties to participants or beneficiaries.”

According to Lungstrum, in Great-West, the Supreme Court was considering a claim more akin to a breach of contract action, arising from a contractual duty instead of a fiduciary duty, and the Court quite unremarkably determined that such a claim was a legal claim, distinguished from equitable claims that ordinarily involved imposition of constructive trusts. The claim in the present case, on the other hand, is essentially a claim for breach of trust arising from a non-contractual, fiduciary duty.

Lungstrum reasoned that the plaintiffs would not be entitled to money damages on behalf of the plan until they obtained a ruling that defendants breached their fiduciary duties—an issue traditionally within the court’s equitable domain. Thus, the plaintiffs’ monetary claim is inextricably intertwined with equitable claims, and so must be deemed equitable as well for purposes of applying the Seventh Amendment, he said.

The case is In re YRC Worldwide Inc. ERISA Litigation, D. Kan., No. 09-2593-JWL.

Data & Research December 1, 2010

The “Transition” Phase Allows Work and Play Together

Cynthia Egan, president of T. Rowe Price Retirement Plan Services, and Christine Fahlund, a senior financial planner at T. Rowe, believe the industry should move away from the negative connotations surrounding a “delayed” retirement.

Reported by

Nicole Bliman

Speaking to the press at a breakfast at the T. Rowe Price 2011 Investment and Economic Outlook meeting, Egan and Fahlund said they saw positive signs that retirement preparedness is steadily improving in these post-recession times. Egan said the Pension Protection Act (PPA) of 2006 was a huge milestone for the industry and credits it with many of the improvements she sees, including auto-enrollment features being a part of 53% of plans, versus 22% of plans in 2005 (pre-PPA), and 81% of plan sponsors using an auto-increasing feature, up from 11% in 2005.

However, total account balances are still far too low, said Egan – most plan participants have saved less than $200,000. The national average deferral rate is 6.1%, she said; for those 65 years and older, the average is 11.1%. Egan and Fahlund said they would like to see the national average get closer to 15% (but they also noted that wouldn’t be reasonable for every age group). This lack of a strong nest egg will be challenging for people to overcome as retirement approaches.

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One solution that many in the industry are discussing is guaranteed retirement income. Egan said it’s as if “an arms race for new products” has taken off. But, she cautions, retirement income solutions need to be about more than the product itself –advisory and educational support and services are just as important.

Participants are most concerned with simplicity and flexibility, said Egan. Terms such as “surrender fees,” “no access to cash,” or “no daily value” would not rest well with participants. Plan sponsors are also on the fence when it comes to guaranteed products – are they willing to take on the extra fiduciary responsibility once the participant retires, or would they rather let the participant off on their own?

Changing the Focus

Since the recession, plan participants have been bombarded with concepts that they have no control over – the markets, inflations, legislation, etc. Egan and Fahlund say the industry needs to refocus onto things that participants can control, such as how much they save, when they retire, working part-time in retirement, and when to tap into Social Security.

Fahlund spoke of the burgeoning “transition” phase of retirement that takes place around the ages of 55-68. She described it as a “fairly long period of time when you’re getting your act together…and it can’t happen overnight.” Every individual or couple is different, but the one thing everyone needs is a plan, she said. Whether it’s a mortgage that hasn’t been paid off or higher-than-average medical costs, all pieces of the financial puzzle need to be attended to.

The fact is that with so many people not fully prepared for retirement, they will have to delay a “complete” retirement for a few years. But Fahlund wants the industry to stop looking at delaying retirement with such “drudgery.” Some of her ideas may seem counter-intuitive, but one idea is that if a participant who was planning to retire at age 62, keeps working until age 70, they should stop contributing to their plan. She says they can take the money they would have deferred and have fun with it and let what they have accumulated keep growing in conservative investments. Not only does this allow you to keep earning a salary, but contributions at that late stage in the game are almost like “a dollar in, a dollar out,” since that money won’t have any time to really grow. Along the same lines, Fahlund also suggests having some sort of part-time job in retirement – even if it “just” pays $20,000 a year, that’s $20,000 you can keep invested.

The main message Fahlund hopes will take hold is a general “reframing” of retirement. People need to be able to work and play at the same time. She says people should look at a delayed retirement as “extra money,” rather than “working longer.”