While
headlines have stated the disappearance of defined benefit (DB) retirement
plans, a report from Aon shows only 6% of U.S. corporate DB plan obligations
have actually been settled since 2012.
“While
the number of closed and frozen defined benefit plans continues to increase,
plan sponsors still have an obligation to fund these plans, which means they
are far from being eliminated altogether,” says Rick Jones, retirement and
investment senior partner at Aon. “Pension risk transfer is a trillion dollar
market, and much more will be settled in coming years as corporate finance and
insurance market environments allow. There is only so much bandwidth in both,
but plan sponsor interest and market capacity continue to grow.”
Aon’s
study, covering 100 U.S. plan sponsors totaling nearly four million
participants and $400 billion in assets, found the majority of plan sponsors
are continuing to look at settlement strategies to opportunistically shrink the
size of their pension plans. Forty-three percent have implemented a lump-sum
offer to former employees, and 39% say they are somewhat or very likely to
implement this approach in the next 12 to 24 months. While just 8% have
implemented an insured annuity buyout to date, the number of plan sponsors
adopting this strategy could at least double within the next 12 to 24 months,
Aon says.
“PBGC
premiums are becoming a material drag on pension asset growth for underfunded
plans,” says Ari Jacobs, global retirement solutions leader at Aon. “We’re
seeing situations where expected PBGC premiums owed on behalf of some
participants are even greater than the value of their expected benefits. Targeted annuity buyouts are
capturing the interest of plan sponsors because these solutions can transfer
higher-cost obligations to an insurer, where those benefits can be provided
much more economically.”
Pension
Benefit Guaranty Corporation (PBGC) premiums are one reason for a surge in corporate
pension contributions. In addition to significantly increased usage of
corporate debt, contributions are being financed by a number of other sources, with the predominant sources being operating cash flow (75%) and cash reserves
(39%), Aon found.
“There are many
reasons that plan sponsors are looking to increase cash contributions,
including increased PBGC premiums, the prospects for tax reform, growing
impatience with continued pension deficits and the expiration of legislated
funding relief,” says Jones.
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General Electric 401(k) Fiduciaries Accused of Self-Dealing
Participants in GE's 401(k) plan allege the company retained proprietary investments in the plan, even when they were imprudent, in order to earn revenue.
Participants
in General Electric’s 401(k) plan have filed a proposed class action Employee
Retirement Income Security Act (ERISA) lawsuit accusing the firm and plan
fiduciaries of self-dealing.
According
to the complaint, the harm to participants arises from five of the plan’s
funds: GE Institutional International Equity Fund, GE Institutional Strategic
Investment Fund, GE RSP U.S. Equity Fund, GE RSP U.S. Income Fund and GE Institutional
Small Cap Equity Fund. The complaint notes that the plan has nearly one-quarter
of a million participants and more than $28 billion in assets, making it one of
the largest 401(k) plans in the country.
The
plaintiffs claim GE representatives encouraged the plan’s participants at
company meetings to invest their 401(k) account assets in GE’s proprietary
mutual funds, which GE Asset Management (GEAM) managed until July 1, 2016. “GE
was aware that despite the performance of the proprietary mutual funds it
selected for the plan, GE would stand to earn significant revenues and profits
in investment management fees that GEAM would charge the plan’s participants,”
the complaint says. “GE prioritized profit over its fiduciary duty and saddled the
plan’s participants with substandard proprietary mutual funds.”
As
of December 31, 2015, 68% of the plan’s assets comprised GE-related investment
options and approximately 56% of the pooled investment fund options available
in the plan consisted of five of GE’s proprietary mutual funds. The lawsuit
says GE’s selection of its proprietary mutual funds for the plan provided GEAM
a constant source of fees and helped inflate the market value of GEAM, which GE
sold to State
Street for a reported $485 million on July 1, 2016.
The
plaintiffs allege that GE selected and retained its poor-performing proprietary
mutual funds for the plan when superior investment options were readily
available. In addition, to the detriment of the plan’s participants, GE through
GEAM profited from an arrangement where investment sub-advisers managed the plan
for a rate less than the amount GEAM earned from the plan’s participants in
investment management fees. During the class period, according to the lawsuit, GE
earned hundreds of millions of dollars from GEAM and its management of the plan,
while the plan’s participants suffered losses in the hundreds of millions of
dollars.
NEXT: About the Funds
The
complaint says the International Fund suffered from chronic underperformance
relative to its benchmark and other readily available alternatives dating back
to January 2008. In the nine-year period between 2008 and 2016, the
International Fund’s annual returns fell short of the benchmark every year but
2012 and 2015. During that same period, the International Fund underperformed
relative to most of the comparable international equity mutual funds
Morningstar identified. In 2010, the International Fund performed worse than
90% of the hundreds of international equity mutual funds available on the
market. The International Fund also performed worse than 78%, 87%, and 73% of
international equity mutual funds in 2011, 2014 and 2016, respectively.
Morningstar’s total number of identified comparators ranged between 339 and 592
mutual funds.
In
the nine-year period between 2008 and 2016, the Strategic Fund’s annual returns
were below most of the moderate-risk, target mutual funds Morningstar
identified, according to the lawsuit. In 2010, the Strategic Fund performed
worse than 85% of the hundreds of moderate risk target mutual funds available
on the market. The Strategic Fund also performed worse than 81%, 53%, 69%, and
78% of moderate risk target mutual funds in 2011, 2013, 2014, and 2016,
respectively. Morningstar’s total number of identified comparators ranged
between 431 and 727 mutual funds.
The
RSP Equity Fund suffered from chronic underperformance relative to its
benchmark and other readily available alternatives dating back to January 2009,
according to the complaint. In the eight-year period between 2009 and 2016, the
RSP Equity Fund’s annual returns were below the benchmark in every year but
2009, 2012, and 2013. The underperformance was significant in 2010, 2011, and
2015, when the RSP Equity Fund underperformed relative to most of the
comparable large cap mutual funds Morningstar identified. In 2010, the RSP
Equity Fund performed worse than 87% of the hundreds of large cap mutual funds
available on the market. In 2011, 2015, and 2016, the RSP Equity Fund ranked in
the bottom half of large cap mutual funds. Morningstar’s total number of
identified comparators exceeded 1,000 mutual funds.
The
lawsuit says from 2008 through 2010, the RSP Income Fund underperformed its
benchmark (i.e., the Bloomberg Barclays U.S. Aggregate Bond Index) by 3.65%.
During the same three-year period, the RSP Income Fund also significantly
underperformed relative to the comparable mutual funds of investment leaders
(e.g., Vanguard, PIMCO, and BlackRock) in the fixed income asset class. The RSP
Income Fund’s underperformance relative to comparable fixed income mutual funds
continued until July 2016 when GE sold GEAM to State Street.
“Any
reasonable, disinterested investor monitoring their investments would have
viewed these funds as imprudent investments,” the complaint states. The
participants allege that the International Fund, the Strategic Fund, RSP Equity
Fund, and RSP Income Fund experienced net redemptions as potential new
investors sought to avoid these funds and GE’s investment advisory services.
According
to the lawsuit, the Small Cap Fund was the only GE proprietary fund that
consistently outperformed its benchmark. However, in contrast to its practice
with the GE Funds, GEAM did not actively manage the Small Cap Fund’s assets,
but hired and negotiated a fee with multiple investment sub-advisers to manage
the fund. The participants allege that GEAM collected an investment management
fee from the Small Cap Fund’s performance and retained for itself the
difference between the management fee it collected from the fund and the fee it
agreed to pay its investment sub-advisers. “From this arrangement, GEAM—and
thereby GE—collected millions of dollars in unreasonable and/or excessive fees
for services that GE was ultimately responsible for performing as the plan’s
administrator,” the complaint says.
The participants seek
to remedy the defendants’ harm and unlawful conduct, prevent further mismanagement
of the plan and obtain equitable and other relief as provided by ERISA.