Compliance October 7, 2009

Flight from Equities in Cash Balance Plan no ERISA Miscue

October 7, 2009 (PLANSPONSOR.com) - An employer's move to reduce its equity holdings and increase fixed income investments in its cash balance pension plan did not represent an illegal benefits reduction, a federal judge has ruled.
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U.S. DistrictJudge J.P. Stadtmeuller of the U.S. District Court for the Eastern District of Wisconsin asserted that the decision by S.C. Johnson & Sons did not violate the anti-cutback rule in the Employee Retirement Income Security Act (ERISA). Stadtmeuller said the employer’s pension plan changes did not result in a “reduction of accrued benefits” that would trigger the ERISA provision prohibiting sponsors from changing their plan in a way that generates lesser benefits for participants.

The court pointed out that the law could not tie sponsors to a specific investment strategy to avoid an anti-cutback rule violation because that would keep them from being able to respond to changes in the economy and the markets.

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“These managers would be unable to exercise their fiduciary duties and respond to changing market conditions; conditions which may, at times, call for a more conservative approach to the allocation of assets in order to preserve the financial integrity of the plan,” the court contended.

The court said the plans’ investment strategy change was to reduce their investment in equities and invest more in fixed income funds. “A particular percentage of assets invested in equities versus fixed income is not a protected benefit and a change to these investment percentages does not support a §204(g) [anti-cutback rule] claim,” Stadtmeuller wrote.

In addition, the court pointed out that Treasury Regulation Section 1.411(d)-4 specifically states that the right to a particular form of investment is not subject to the protections of the anti-cutback rule.

The participants’ suit alleged the more conservative investment approach resulted in lower rates of return, which, in turn, lowered “interest credits” deposited in their notional accounts. The court said the claim was related to the performance of the plans’ trust investments, given that the plans stated that participants’ accounts would be credited at a rate of either 4% or 75% “of the rate of return” generated by the plans’ trust.

The case is Thompson v. Retirement Plan for Employees of S.C. Johnson & Sons Inc.,E.D. Wis., No. 07-CV-1047.

Deals and People October 6, 2009

Wanted: Investment Consultant

October 6, 2009 (PLANSPONSOR.com) - The nation's second-largest public pension plan is looking for some help.
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The California State Teachers’ Retirement System (CalSTRS) has launched a search for a firm to serve as the general consultant to the Investment Committee.

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Other Duties

The general consultant works directly for the Investment Committee and serves as a source of investment advice. Among other duties, CalSTRS says the successful firm will be expected to provide the following:

  • Oversee and advise on the total CalSTRS investment portfolio, policies and activity.
  • Conduct asset/liability studies.
  • Present and evaluate semi-annual reviews of investment performance.
  • Conduct special project consulting for the investments staff, not to exceed 20 percent of the contract.
  • Advise on CalSTRS defined contribution portfolios in the future.

Requests for proposals are being sought through a competitive process due to the pending expiration of the existing contract. Pension Consulting Alliance currently holds the General Investment Consultant contract and may rebid. The new contract will run for three years with an option of two, one-year extensions.

The final filing date for proposals is October 22, 2009. CalSTRS says that a copy of the request for proposals is available online at www.calstrs.com/rfp .

The Investment Committee of the Teachers’ Retirement Board will interview the top three firms and announce a selection at its November 6 meeting.

The California State Teachers’ Retirement System, with a $126.9 billion portfolio, is the second largest public pension fund in the United States. It administers retirement, disability and survivor benefits for California’s 833,000 public school educators and their families from the state’s 1,400 school districts, county offices of education and community college districts.

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