Overfunding Makes Challenge to DB Plan Management Moot
In the years following the filing of a lawsuit against U.S. Bank, it has made changes to its DB plan investing practices that have resulted in the plan being overfunded.
A lawsuit filed by participants in
U.S. Bank’s defined benefit (DB) retirement plan has been dismissed as
moot because the plan is now overfunded.
Plaintiffs in the case
challenged U.S. Bank’s management of its DB plan from September 30,
2007, to December 31, 2010. They challenged the bank’s adoption of a
risky strategy of investing plan assets exclusively in equities and its
continued pursuit of that strategy in the face of a deteriorating stock
market, the bank’s investment of plan assets in the bank subsidiary FAF
Advisors, and FAF Advisors’ actions with regard to a securities lending
portfolio. The plaintiffs seek to recover plan losses, disgorgement of
profits, injunctive relief, and/or other relief under the Employee
Retirement Income Security Act (ERISA).
The U.S. District Court
for the District of Minnesota previously dismissed the 100% equities
strategy allegations and granted summary judgment for U.S. Bank on the
securities lending program claims, but held that the affiliated funds
allegations survived in part. The court found that these allegations
adequately alleged an injury in fact: that as measured by ERISA’s
minimum funding requirements, “the plan lacked a surplus large enough to
absorb the losses at issue.”
However, in the current court opinion,
U.S. District Judge Joan N. Ericksen, noted that the plan is now
overfunded by ERISA measures, and citing other court cases, she
determined that the case is moot because the issues presented are no
longer “live” and the plaintiffs lack a legally cognizable interest in
any outcome. In addition, she found it is impossible to grant any
effectual relief now that the plan is overfunded.
NEXT: No expectation for misconduct to continue
Ericksen cited a 3rd U.S. Circuit Court of Appeals decision that said
allowing participants in an overfunded plan to pursue their claims
"would not advance ERISA's primary purpose of protecting individual
pension rights, because the pension rights of such plaintiffs are fully
protected, and would if anything be adversely affected by subjecting the
plan and its fiduciaries to costly litigation."
However,
Ericksen noted that where the defendant initiates an event or events
that might moot a case, the defendant bears a burden under what is
called the "voluntary cessation" exception to mootness of showing that
it is absolutely clear the allegedly wrongful behavior could not
reasonably be expected to recur. Since the case was filed, U.S. Bank
abandoned its 100% equities investment strategy and "meaningfully began
to diversify into asset classes other than equities," the opinion said.
In addition, the bank sold FAF Advisors in 2010 and "ceased to use
parties in interest to manage a significant portion of the plan's
assets."
Ericksen found that the plaintiffs offered nothing but speculation that
the alleged misconduct will resume, and concluded their concerns about
U.S. Bank’s potential future misconduct are "too conjectural or
hypothetical to present an actual controversy" and cannot save the case
from mootness now that the plan is overfunded.
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New Legislation Provides Opportunities for Church Plans
While the ability to implement auto enrollment will provide an immediate opportunity for church plan sponsors to improve participant outcomes, other parts of recently passed legislation also warrant review.
Section 336 of the Protecting
Americans from Tax Hikes (PATH) Act (S. 2029), which was passed as part
of the recent budget deal signed into law by President Obama on December
18, 2015, contains a number of significant provisions affecting church plans.
The
measure addresses each of the five issues in bills previously
introduced to Congress by lawmakers, including controlled group rules,
grandfathered defined benefit (DB) plans, automatic enrollment in church
defined contribution (DC) plans, transfers between 403(b) and 401(a)
plans, and investing in collective trusts.
Sources PLANSPONSOR
spoke to said that the provision allowing church plans to offer
automatic enrollment, which preempts any state laws, will have the
biggest impact on church plans.
Joy Roberts, leader of the
relationship management group that works with plan sponsors at
GuideStone Financial Resources in Dallas, tells PLANSPONSOR, “We were
extremely pleased when the legislation was passed. It gives our church
plan sponsors the ability to increase employees’ savings opportunity,
and it levels the playing field for church plans compared to Employee
Retirement Income Security Act (ERISA)-governed defined contribution
(DC) plans.”
Caroline Burks, department head of compliance at
GuideStone Financial Resources in Dallas, explains that whenever a
client would approach GuideStone about wanting to implement automatic
enrollment in their DC plans, GuideStone would tell them they need to
look at state laws to see if they could do that. The company has had
churches and other plans not subject to non-discrimination testing
express interest in auto enrollment. “Some have already implemented it,
but some have been reluctant because of having to research state law,”
she says.
Burks notes that at the end of last year, the Internal
Revenue Service (IRS) issued guidance that made it easier to correct for
auto enrollment errors. “That, coupled with the new legislation
preempting state laws, gives us a good message to bring to our clients
that makes auto enrollment less daunting,” she says.
NEXT: The administration and cost considerations
Thomas Macaluso, enrolled actuary
and vice president and actuary as well as practice leader of the church
plan practice at USI Consulting Group in New York City, says the auto
enrollment legislation is interesting for church plan sponsors because
these organizations seem to be going through changes similar to the
corporate world, where they are shifting from defined benefit (DB) plans
to DC plans. “Many [church organizations] went through an exhaustive
effort to get their DC plans in order, but auto enrollment is something
they may or may not have focused on,” he says.
He
thinks there may be a couple of things that may make church plans
hesitant to implement auto enrollment. For example, Catholic dioceses
have multiple employers and multiple locations and no centralized
payroll system, so it could be hard to get auto enrollment set up with
providers. In addition, church plans are very paternalistic and may not
want to offer auto enrollment to lower-paid individuals. Roberts says
small churches also may find it difficult to administer because of
limited internal resources.
But, in general, Macaluso thinks
there will be an uptake of auto enrollment among church plans. “We have
surveyed dioceses, and in the past couple of years have asked about auto
enroll,” he says. “About 20% say they offer it, but we think we’ll see
that increase after this as plans continue to modernize themselves and
more switch to DC plans.”
Burks says costs are considerations
that plan sponsors have to weigh, but there is also the stewardship
responsibility they have to help employees prepare for retirement. When
consulting with clients, GuideStone does think about that added
administration and match contribution costs.
“We go through the
same approach of trying to identify plan objectives and goals as those
who help corporate plan sponsors,” Roberts says. “The best way to engage
employees is through plan design and auto features, but we do consider
the financial impact of a plans goals and objectives.” She says
GuideStone expects larger and non-qualified church controlled
organizations (Non-QCCOs) that thought it was legally daunting will want
to adopt auto enrollment now. “It won’t happen overnight, but we have
two or three clients right away talking about it in the new year.”
Macaluso
suggests that before deciding to implement auto enrollment, advisers can help church plan
sponsors do a cost analysis. “Especially with organizations
that are holding on to a DB plan that is not fully funded, they need to
manage what will need to be provided in matching contributions to the DC
plan and what they need to do to fund the DB plan,” he says. He notes
that some plan sponsors don’t realize that if they freeze their DB plan,
they will still have to fund and administer that plan.
NEXT: Additional provisions of the church plan legislation
The legislation includes a provision that allows assets of a church
plan described in section 401(a) of ERISA to be transferred to a 403(b)
plan. Burks says GuideStone was also excited about this provision
because it has clients that were sold a 401(a) plan that didn’t
understand the benefits of sponsoring a 403(b) rather than a 401(k)
plan. “These clients that have a 401(k) and want to establish a
403(b)(9) plan, won’t have two plans to maintain. We will look at this
provision more closely to see how we can help clients,” she says.
Previously,
the controlled group rules for tax-exempt employers may have required
certain church-affiliated employers to be included in one controlled
group (i.e., treated as a single employer), even though they have little
relation to one another. But, the new legislation lays out specific
guidelines for determining what employers are part of a controlled
group. While the legislation states that none of its provisions is
intended to have, or appears to have, any impact on the ongoing
litigation against church-related hospitals over the church plan
definition, one does wonder if this could provide a test for determining
if an entity is a church-affiliated organization.
Macaluso says
controlled group rules could be a measure of relationship for the
ongoing litigation, but that remains to be seen. “We do have church
clients that have these types of entities that a long time ago were
obviously part of the church, but may now be questionable. We are going
to sort through all the rules, because we think there could be some
impact,” he says. He adds that it is prudent for organizations to think
they might have an issue worth reviewing with an attorney.
The
legislation also included a provision that church plan investment boards
may now be able to invest in collective trusts. Plan sponsors in the
corporate world are increasingly turning to collective trusts
as a way to simplify and cut costs. But, interestingly, it was
difficult to find sources that wanted to speak about the potential
benefit this could provide church plans, making one wonder from where
lawmakers got the idea to push this provision.
Macaluso says he
knew there was some debate about it, but USI doesn’t have a lot of
experience with collective trusts and hasn’t had any clients trying to
invest in them. Burks also tells PLANSPONSOR GuideStone clients are not
asking about the ability.
However, in general, Macaluso thinks this legislation presents a good
opportunity for advisers to consult with church plan sponsors about
getting DC plans in order. A number of church plans still have multiple
vendors providing investments; reviewing investments could reveal
opportunities to reduce fees. And, they should discuss auto enrollment,
as well as the opportunity to obtain more services and reduced fees as
plan assets grow due to auto enrollment, he concludes.