Compliance July 13, 2021

Worker Misclassification Alleged in ERISA Lawsuit

A man who worked for Yum! Brands for 25 years says he was denied retirement and other benefits because the company classified him as an independent contractor.

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A man has sued Yum! Brands Inc., Taco Bell Corp. and various individual defendants, seeking recognition of his years of employment from 1995 through 2020 for purposes of calculating his retirement benefits with three retirement plans, including a nonqualified deferred compensation (NQDC) plan, sponsored by the company.

According to the complaint, common law employees were eligible for the plans per their governing documents. The complaint alleges that the plaintiff met the test for employee status per prior case law, but Yum misclassified him as an independent contractor.

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The lawsuit explains that the man started employment as a recruiter for Taco Bell when it was owned by PepsiCo. It details how he stayed with the company when it was spun away and eventually acquired by Yum. During his 25 years with the company, the plaintiff held the title of executive recruiter.

Although he was classified as an independent contractor, the plaintiff participated in Yum corporate events and team meetings, the company dictated his hours, he was given an office in Taco Bell’s corporate headquarters and he used a company email address and the company’s computer systems to perform his work. The plaintiff was also prohibited from taking outside work to perform similar services for other fast-food businesses.

According to the complaint, “other similarly situated Yum employees received salaries, bonuses and employee benefits such as pensions, vacation pay and health insurance. However, the plaintiff was only compensated on a monthly basis as an independent contractor and received no other employee benefits although he was treated as an employee for all other purposes.”

The lawsuit includes several claims for relief under the Employee Retirement Income Security Act (ERISA), seeking the benefits that are allegedly due to the plaintiff. In addition, he brings claims under federal and state labor codes for failure to pay all wages and for unreimbursed expenses.

The complaint contends that it would be futile for the plaintiff to exhaust administrative remedies because the company first ignored and then declined his request for a copy of pertinent plan documents, saying they could not be provided because he was not a participant in the plans. In addition, the lawsuit says the plaintiff “lacks meaningful access to the review procedures” under the plans.

Yum! Brands has not yet responded to a request for comment about the lawsuit.

Data and Research July 13, 2021

High Equity Allocations at Retirement a Dangerous Path for Retirement Income

A TDF with a moderate equity allocation at retirement and an inflation-protected bond portfolio that uses LDI principles mitigates the various risks participants face in retirement.

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A recent study offers food for thought for plan sponsors considering which target-date funds (TDFs) will best meet the income needs of participants as they approach retirement.

Dimensional Fund Advisors (DFA) has published a detailed analysis focused on the performance of different investment and spending strategies in retirement, including a thorough examination of potential TDF glide paths and their impact on retirement outcomes.

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As summarized in an abstract prepared by the firm, investment strategies considered in the analysis include “wealth-focused” glide paths, which combine equities with short-term, high-quality fixed income investments, and “income-focused” glide paths, which combine a moderate equity allocation at retirement and an inflation-protected bond portfolio that uses liability-driven investing (LDI) principles. The spending rules considered include fixed spending similar to the 4% rule (a general rule used to determine how much a retiree should withdraw from a retirement account each year), flexible/variable spending, as well as nominal and real annuitization.

At a high level, the paper finds that, for all spending strategies, an income-focused asset allocation delivers similar retirement income to the wealth-focused allocations. However, the income-focused approach is shown to offer better protection against market downturns, interest rate risk and inflation risk.

“Average assets at age 65 are virtually equal for the wealth-focused allocation with a high equity landing point and the income-focused allocation,” the paper explains. “Notably, the moderate equity landing point of the income-focused glide path reduces the dispersion of outcomes significantly without reducing the average.”

For those using a fixed spending approach, the paper shows, the income-focused allocation has the lowest failure rate. The strategy generates similar lifetime income to the high-equity wealth-focused allocation, along with higher income than the moderate-equity wealth-focused allocation. However, the income-focused strategy offers better downside protection, as measured by the 10th percentile of average income.

For those desiring flexible spending, the income-focused allocation outperforms the moderate-equity wealth-focused allocation on all measures, according to the paper, despite having similar equity exposure.

The paper goes on to show how a TDF glide path with an LDI philosophy can deliver an attractive trade-off between income growth and income risk management. Along these lines, the results suggest that high equity exposure in retirement is an inadequate tool to manage longevity risk.

“A higher exposure to equity leads to higher failure rates under fixed spending, even when longevity is higher than expected; the benefits under flexible spending are also limited,” the analysis warns. “Annuities, which are designed to address longevity risk, are a more appropriate tool. They can also generate higher average income because of mortality pooling, though they require the investor to give up control of her annual spending and assets.”

According to the paper, even moderate increases in inflation and decreases in interest rates can substantially reduce the income generated by the two wealth-focused strategies. The income-focused glide path, on the other hand, is protected against such events by design.

Overall, the study finds that asset allocations in wealth-focused TDFs can leave retirees overly exposed to a number of risk factors—namely market volatility, interest rate movements and inflation increases. Most concerning, these increased risks often seem to come without any additional expected income benefits. The study also tellingly reviews the interaction of asset allocations and spending rules. Notably, fixed spending based on the 4% rule appears to magnify the impact of the three risks above, while more flexible spending can partially diminish their impact.

According to the analysis, unexpectedly volatile TDFs can have substantial negative impacts on retirees. In fact, they are currently under examination by members of Congress. This is a good thing, the paper suggests, because the sheer magnitude of the risks facing retirees is underappreciated.

“A high allocation to equities does not help manage longevity risk and is no substitute for proper risk management and retirement planning,” the paper concludes.

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