Compliance May 19, 2020

ManTech ERISA Challenge Shows Cases Moving Down Market

The plan in question has about $800 million in assets, meaning it is quite a bit smaller than many other employers that have faced fiduciary breach lawsuits.

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Plaintiffs have filed a new class action Employee Retirement Income Security Act (ERISA) complaint against the ManTech International Corp., alleging a number of fiduciary breaches in the operation of the firm’s defined contribution (DC) retirement plan.

The plaintiffs allege that during the putative class period—defined as May 15, 2014, through the date of judgment—the fiduciary defendants “failed to objectively and adequately review the plan’s investment portfolio with due care to ensure that each investment option was prudent, in terms of cost.” The challenge also suggests the company has maintained certain funds in the plan despite the availability of identical or similar investment options with lower costs and/or better performance histories. 

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“To make matters worse, defendants failed to utilize the lowest cost share class for many of the mutual funds within the plan, and failed to consider collective trusts, commingled accounts or separate accounts as alternatives to the mutual funds in the plan, despite their lower fees,” the complaint continues. “Defendants’ mismanagement of the plan, to the detriment of participants and beneficiaries, constitutes a breach of the fiduciary duties of prudence and loyalty, in violation of 29 U.S.C. Section 1104. Their actions were contrary to actions of a reasonable fiduciary and cost the plan and its participants millions of dollars.”

The new complaint, filed in the United States District Court for the Eastern District of Virginia’s Richmond Division, very closely resembles others that have been filed by the Capozzi Adler P.C. law firm. Like the previous suits, this one names as defendants, in addition to the ManTech company, its board of directors, the retirement plan committee and several dozen individual “John Doe” defendants.

According to the plaintiffs, the ManTech defendants have retained several actively managed funds as plan investment options despite the fact that these funds “charged grossly excessive fees compared with comparable or superior alternatives,” and despite ample evidence available to a reasonable fiduciary that these funds had become imprudent because of their high costs. 

“During the class period, the plan lost millions of dollars in offering investment options that had similar or identical characteristics to other lower-priced investment options,” the complaint states. “The funds in the plan have stayed relatively unchanged since 2014. Taking 2018 as an example year, a signification portion of funds in the plan, almost half, were much more expensive than comparable funds found in similarly sized plans (plans having between $500 million and $1 billion in assets). The expense ratios for funds in the plan in some cases were up to 129% above (in the case of the Oakmark Equity and Income Investor) the median expense ratios in the same category.”

Another argument elucidated in the complaint is that “it is not prudent to select higher cost versions of the same fund even if a fiduciary believes fees charged to plan participants by the retail class investment were the same as the fees charged by the institutional class investment, net of the revenue sharing paid by the funds to defray the plan’s recordkeeping costs.”

“Fiduciaries should not choose otherwise imprudent investments specifically to take advantage of revenue sharing,” the complaint states. “This basic tenet of good fiduciary practice resonates loudly in this case, especially where the recordkeeping and administrative costs were unreasonably high as discussed. A fiduciary’s task is to negotiate and/or obtain reasonable fees for investment options and recordkeeping/administration fees independent of each other if necessary.”

ManTech has not yet responded to a request for comment. The full text of the complaint is here.

The Markets May 19, 2020

Managers Warn Stocks Could Fall Further

Citing elevated valuations and rising tensions between the U.S. and China, some say a V-shaped recovery is unlikely.

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In its latest market outlook, LPL Financial says downside risk remains and points to three main factors behind that risk: elevated stock market valuations, Federal Reserve Chairman Jerome Powell’s pessimistic outlook for the economy and the markets, and rising tensions between the United States and China.

LPL also says investors are increasingly skeptical about a smooth, V-shaped recovery and that stocks could fall further, despite that fact they have rallied more than 30% from their March 23 lows. LPL says it is common to see 10% corrections after big rallies from major bear market lows.

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Companies are cutting their earnings expectations dramatically, LPL says. The firm says the forward price-to-earnings (P/E) multiple for the S&P 500 Index, which covers the next 12 months has eclipsed 20, which is overvalued based on historical averages. In fact, it is at its highest level since the dot-com bubble in the late 1990s.

However, these fears may prove to be exaggerated if there is a steady earnings recovery beginning later this year, which LPL says it expects to happen.

“So while we acknowledge valuations are high relative to historical trends and a larger pullback would not surprise us over the near term, the market’s forward P/E ratio using depressed 2020 earnings doesn’t worry us too much, given the environment,” LPL says in its outlook.

Because the economy is contracting sharply, more fiscal policy support from Congress may be needed, LPL says. Powell had asked Congress to consider implementing more relief measures.

“We think markets generally have already priced in a historically sharp—but short-lived—economic contraction, even though along the road to recovery there may be some bumps that bring periodic bouts of market volatility,” LPL says in the report.

LPL says it may be possible that President Donald Trump thinks taking a tough approach with China will win him votes in November. If he takes this approach, the firm says, it could cause more market volatility. “Markets might get jittery if it looks like the United States may pull out of the trade deal signed with China in January,” LPL says.

On an optimistic note, LPL says it is encouraged by progress made so far in containing the coronavirus, signs that the U.S. economy starting to open up and the massive federal relief package that has provided “stocks with a tailwind that may get stronger in the coming weeks, along with another stimulus package potentially on the way.”

Considering all this, LPL is recommending “overweight equities in the intermediate-term period, especially in the context of dampened return prospects for bonds at such low interest rates.”

In its second quarter 2020 investment outlook, Kingswood tends to agree with many of LPL’s premises.

“The global economic downturn is of unprecedented severity—but the policy stimulus unleased is equally unparalleled,” Kingswood says in its report. “Economic activity should recover now that lockdowns are being relaxed, but a return to normality is unlikely for some time.”

Kingswood also says equities are likely to fall back in the short run because of steep equity valuations. Longer term, once the economy begins to reignite, the firm says it is more positive on equities as they “usually see substantial gains in the early stages of a bull market.”

Kingswood is retaining a “sizeable exposure to thematic equities, including technology and environmental change.” As far as bonds are concerned, Kingswood is bullish on corporate bonds but bearish on government bonds.

“The policy stimulus will be crucial in preventing major lasting damage to the economies,” Kingswood says in its outlook. “Even so, it is far from clear how strong the rebound will be. Most obviously, it will depend critically on how quickly and sustainably the lockdowns can be eased.”

Because a vaccine is unlikely to be developed until 2021 at the earliest, Kingswood says, social distancing of some kind is likely to be a fact of life for at least a year. As a result, travel and hospitality are unlikely to return to pre-coronavirus levels anytime soon.

Like LPL, Kingswood is worried about a return to a U.S.-China trade war, which would put a damper on growth.

“All this leaves us skeptical that there will be a sharp V-shaped recovery in the global economy,” Kingswood says. “We think it is unlikely that economic activity will return to pre-COVID-19 levels until the end of next year, with a risk that it could take longer still.”

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