Compliance November 3, 2014

Plan Fiduciaries Liable for Mispriced ESOP Stock Purchase

The owner of Bruister and Associates and trustees of its employee stock ownership plans (ESOPs) were found responsible for causing the plan to pay too much for employer stock.
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A U.S. District Court judge has issued a judgment and order requiring fiduciaries to pay more than $6.48 million to the two employee stock ownership plans sponsored by Bruister and Associates Inc. (BAI).

BAI was a home-service provider that installed and serviced satellite-television equipment for its sole client DirecTV. According to a lawsuit filed by the U.S. Department of Labor in U.S. District Court for the Southern District of Mississippi, during a three-year period, from December 2002 to December 2005, Herbert Bruister, the sole owner of BAI, sold 100% of BAI’s shares to the plans for $24 million. In each instance, Bruister and Amy Smith served as trustees to the plans and members of the BAI Board of Directors. Jonda Henry served as trustee for the three purchases tried by the Court.

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According to court documents, Bruister, Smith and Henry, as plan fiduciaries, engaged in prohibited transactions by causing the plans to pay excessive prices for BAI stock purchased from Bruister. For each purchase, the fiduciaries used flawed valuations prepared by Matthew Donnelly and his firm, Business Appraisal Institute.

The court also found that the three fiduciaries breached their duty of loyalty from start to finish. Additionally, Bruister and his attorney David Johanson went so far as to fire the initial attorney representing the plans because that attorney was too thorough. Moreover, the court found that Bruister and Johanson exercised undue influence over Donnelly’s valuations, and that as a result, Donnelly was not sufficiently independent to provide valuations for the plans.

The court concluded that Bruister, Henry and Smith, in their role as plan fiduciaries, failed to properly represent plan participants’ interests, and that they unreasonably relied on an appraiser who so obviously lacked independence. The court reasoned, “An informed trustee would not have remained idle while the seller communicated directly with the employee stock ownership trust’s independent appraiser and financial advisor in an effort to elevate the price at the participants’ expense.”

Although Johanson was not a fiduciary, the court found his conduct worthy of comment because he was both the attorney for the seller and structured each sale. The court noted that Johanson attempted to influence the valuations in Bruister’s favor, and the testimony Johanson gave at trial did not support his denials. The court even noted that Johanson coached Donnelly during a break in his deposition to retract his testimony that Johanson represented Bruister individually. “History rebuts Johanson’s suggestion that he did not interfere with Donnelly’s valuations and raises doubts as to each of the subject transactions,” the court said.

The court’s order requires Bruister, Smith and Henry to jointly pay $4.5 million in restitution to the plans and requires Bruister to pay an additional $1.98 million in prejudgment interest. The order also held Bruister Family LLC liable with all defendants for $885,065 and jointly liable with Bruister for $390,604.

Products October 31, 2014

Dynamic Reporting Helps Plan Sponsors Improve Plans

One Fidelity Investments sales executive says it was the firm’s technology capabilities that allowed it to win the right to oversee American Airlines’ substantial retirement plans.
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Steve Patterson, executive vice president of sales for Fidelity Investments, says dynamic reporting is the next big thing for plan sponsors—soon all sponsors will demand the ability to segment and analyze different sections of the plan population to identify and combat specific challenges.

A recently developed Fidelity digital tool called Executive Insights provides this reporting. “It’s a suite of business intelligence and analytics tools,” Patterson tells PLANSPONSOR. “Executive Insights basically allows plan sponsor clients to use on-demand data analysis and plan design modeling, as well as income projections, to build a real-time benchmark of where the plan stands today, and how specific plan design changes would impact the plan and its participants. And all of this is tied back to the retirement income picture of the participants.”

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Patterson says, “As the sponsor, you can use our tools to pick out specific populations of the work force, and you can look beyond the averages to the real issues in the plan.” He used the example of a large plan with a diverse and widely dispersed participation population to underscore the importance of this capability.

“So instead of just saying this large plan has an overall participation rate of 70% or 80%, we can now look beyond the averages to the real features of the plan,” Patterson explains. “Even if you have a good participant rate, that can mask the real problem areas in the plan—maybe there is a subset of employees who are missing out, perhaps in one office location or in one staff role. The ability to go beyond the averages and use the modeling tools to look at specific slices of the plan population, and then to use the models to test what effect changes to the plan would have, that’s what we’re delivering with the latest generation of plan technology.”

The Executive Insights system also gives Fidelity a way to track its performance as a service provider, Patterson notes. “We will be working to establish benchmarks and our goal will be to help drive plan improvements over the next five years.”

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