Administration November 11, 2015

Pension Plans Get a Positive Push from the Market in October

Institutional investors of all types found relief from market headwinds.
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The funded status of the typical U.S. corporate pension plan rose in October, increasing by 2.9 percentage points, to 84.7%, according to BNY Mellon Fiduciary Solutions’ Monthly Institutional Scorecard.

Corporate pensions are now up 2.4% year to date, after briefly dipping into negative territory in September. Public plans, and foundations and endowments both exceeded the Scorecard’s monthly return targets by 3.9% and 3.8%, respectively.  

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“For the first time since midsummer, investors finally saw relief from market headwinds, as equities of all flavors had a strong month,” says Andrew D. Wozniak, head of BNY Mellon Fiduciary Solutions. “Corporate defined benefit plan sponsors felt the combined effects of both appreciating asset values and relatively stable liabilities, which led to funded status increases for the typical plan.”

For the typical U.S. corporate plan, Aa corporate discount rates fell by 3 basis points in October, to 4.35%, as investment grade spreads tightened. The decline in rates led to an increase in liabilities of 0.8%, while assets appreciated 4.2%.

Public defined benefit plans in October exceeded their return target by 3.9%, as assets increased by 4.5 percentage points, according to the October BNY Mellon Institutional Scorecard. Still, public plans are short on their year-to-date return target by 5.6%, and one-year return target by 6.9%.

“Investors are starting to come around on risk asset exposure, which definitely helped the equity markets this month,” Wozniak says. “High-yield credit and emerging market debt also saw gains—up 2.7% and 2.6%, respectively. Inflation has been virtually non-existent year to date, and is negative over the past 12 months.”

The October BNY Mellon Institutional Scorecard also noted that endowments and foundations surpassed their monthly spending plus inflation target by 3.8%. Despite the strong October, asset returns for the typical endowment and foundation are still down 53 basis points over the past year, which is behind the spending plus inflation target by 5.1%.

Compliance November 11, 2015

Novant Health Agrees to Settle Excessive Fee Suit

However, in a statement of non-opposition filed with the court, Novant said it disagrees with the claims.
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A settlement agreement has been filed in the U.S. District Court for the Middle District of North Carolina in a case against Novant Health over excessive fees and other fiduciary violations in the administration of its retirement plans.

The settlement calls for monetary relief in the amount of $32 million, as well as non-monetary relief, including that Novant will adopt a new investment policy statement and conduct a competitive bidding process for recordkeeping, investment consulting and participant education services for the plans.

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The lawsuit alleges that Great-West Life & Annuity Insurance Company, the administrative and recordkeeping service provider for the plans, received excessive compensation of approximately $8.6 million between 2009 and 2012. Additional payments received by Great-West from the investment companies providing the plan’s investment options constituted excessive amounts of revenue sharing, the compliant states, which amounted to “kick-backs.”

According to the complaint, D.L. Davis & Company, a registered broker of MML Investors Services, a subsidiary of the Massachusetts Mutual Life Insurance Co., was paid excessive fees up to $9.6 million between 2009 and 2012 in the form of “commissions.” The complaint states that D.L. Davis also received a second source of revenue in the form of “kick-backs” from the managers of the plan investment options.

NEXT: Novant disagrees with the claims

In a statement of non-opposition in support of the proposed settlement, Novant Health stated it disagrees with the claim that it breached its fiduciary duties under the Employee Retirement Income Security Act (ERISA) by maintaining retail class investment funds in the retirement plans rather than lower-cost institutional shares or other lower cost alternatives, causing participants to pay Great-West and D.L. Davis excessive fees. 

For example, Novant says the claims fail to consider the plans’ receipt and use of revenue sharing. The company maintains that revenue sharing was used to cover the costs of plan administration, so with the revenue sharing, the retail funds cost the same as, and in some cases less than, the institutional funds the lawsuit claims it should have offered. Novant also disagrees with the claims concerning fees paid, and says it engaged an outside consultant to review administrative services and fees.

However, it says the proposed settlement would provide a lasting benefit to participants without costly, years-long litigation.

Other non-monetary relief specified in the settlement agreement call for Novant to ensure that the plans’ administrative service providers are not reimbursed for their services based on a percentage-of-plan-assets basis, and review all current investment options in the plans and revise the investment options, as needed, ensuring that those options are selected or retained for the exclusive best interests of participants. The agreement also calls for Novant to remove D.L. Davis, and related entities, from any involvement with the plans; not enter into any new real estate or business relationships with D.L. Davis and related entities; not offer any Mass Mutual investments in the plans or any other investment that provides compensation to D.L. Davis and related entities; provide accurate communications to participants in the plans; and not offer any brokerage services to the plans.

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