Compliance December 6, 2017

CenturyLink Faces ERISA Lawsuit on Custom Large Cap Fund Design

The complaint seeks to state a claim—without relying on hindsight—by arguing the underperformance of a large cap fund was “virtually guaranteed because it contained a serious design flaw from inception.”

Reported by

The latest Employee Retirement Income Security Act (ERISA) lawsuit, emerging from the U.S. District Court for the District of Colorado, targets CenturyLink for alleged mismanagement of an active large cap U.S. stock fund offered to defined contribution plan participants.

By way of background, in 2011, CenturyLink appointed its subsidiary CenturyLink Investment Management (CIM) as its retirement plan investment fiduciary. In 2012, CIM formed the CenturyLink, Inc. Defined Contribution Plan Master Trust and merged the assets of its two 401(k) plans into the master trust. According to the text of the complaint, through the master trust, CIM then reestablished the investment options for the plan considered here, including a number of custom funds designed by CIM.

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The complaint seeks certification of a class consisting of the participants and beneficiaries of the CenturyLink Dollars & Sense 401(k) Plan invested in such a custom menu option, called the “Active Large Cap U.S. Stock Fund.”

In their compliant, plaintiffs suggest the objective of the large cap fund was to “exceed the return of a broad market index of the largest 1,000 companies using an actively managed multi-manager approach.” According to the complaint, CenturyLink hired six different investment firms to manage the large cap fund, and the fund has consistently underperformed its benchmark index, the Russell 1000 Stock Index. The underperformance, plaintiffs allege, exceeded two percentage points or more each year since the investment option was formed in 2012.

The complaint seeks to state a claim—without relying on hindsight—by arguing the underperformance of the large cap fund was “virtually guaranteed” because it contained a serious design flaw from inception.

“This design flaw was built-in by [CenturyLink] by using six different fund managers with the same mandate (five active and one passive),” the complaint states. “The odds of the five active managers outperforming the market in aggregate was highly remote due to the efficiency of the large cap domestic equity market and the difficulty of even one manager outperforming for more than a year … Because of the highly efficient nature of the large cap domestic equity market, companies are generally fairly valued and excess returns are hard to produce over time. Furthermore, the five active managers would inevitably take competing positions and cancel out each other’s strategy. Effectively, the fund managers will be trading stocks among themselves as one manager overweights a stock that another manager chooses to underweight.”

In such an efficient market, plaintiffs argue, it was unreasonable for plan fiduciaries to expect five active managers to outperform in aggregate.

“Indeed, even in an optimistic scenario, it would have only been reasonable to assume the strategy would effectively turn the actively managed large cap fund into an expensive large cap domestic index fund,” plaintiffs suggest. “This also would have been unreasonable given the existence of the ‘U.S. Stock Index Fund,’ a fund heavily weighted to large cap equities, as a plan option.”

The impact of the underperformance of the large cap fund, according to plaintiffs, was magnified by CIM’s other investment option choices. The large cap fund “was one of only three stock funds offered by the plan and the only large cap stock investment option. Moreover, the large cap fund comprised up to 16% of the underlying investments in each of the target-date funds offered by the plan, which reduced the performance of those funds as well.”

The complaint concludes, as an investment professional, “CIM knew or should have known that the large cap fund’s design was flawed and underperforming. The plan fiduciaries breached their duty of prudence by failing to replace or restructure the large cap fund for five years despite its poor design and performance.”

The full text of the compliant is available here.
Data and Research December 6, 2017

Single Women Underestimate Their Financial Knowledge

This is setting their retirement savings back, with many investing in cash.

Reported by

While 97% of single women believe it is important to be engaged in managing their money, three factors are setting them back, Fidelity Investments found in a survey. These are: underestimating their knowledge and experience, not planning for their financial future and saving too much in cash.

Fidelity counts as single women those who have never been married, those who are divorced and those who have outlived a spouse, in its report, “Single Women & Money Study.”

Fidelity says that single women’s underestimation of their financial knowledge is keeping many from planning for their financial future. Many stress out over their finances, much more so than their male counterparts, Fidelity says. Asked what their top financial worries are, 33% say being able to live comfortably in retirement, followed by 31% saying paying down debt and still being able to save for the future, and another 31% citing being able to pay bills should they lose their job. By comparison, men’s rate of responses on these items are 25%, 24% and 24%, respectively.

Only 28% of single women have a comprehensive financial plan, only 53% have a three- to six-month emergency fund, 38% a will, 35% a health care proxy and 24% an estate plan. Fifty-one percent say they either need to spend more time on their finances or admit they don’t spend any time at all on their finances.

Eighty percent of single women keep a portion of their savings in cash, with 35% keeping 50% or more in liquid savings. Twenty percent of single women say they shy away from investing because of the perceived risk. However, 38% invest in the markets for fear of not having enough money in the future—more than the 25% of men who share this opinion.

Eighty-four percent of divorcees say they have more financial freedom than when they were married. Sixty-six percent say they are in better financial shape, although 45% say that after having gotten divorced, they have had to cut back on their spending to save. Twenty-five percent have either applied for or started a new job, and 18% are working on a new educational degree.

Thirty-three percent of divorcees say it look them more than a year to feel financially grounded, and 25% say it has been more than a year and they still don’t feel financially settled.

Fidelity says it is surprising that a scant 5% of women reached out to a financial adviser while they were going through their divorce.

When asked what financial choices they would have made differently in their marriage, divorcees say they wish they had saved more and educated themselves about investing for the long term.

Widows are more likely than other single women to say they feel confident about their finances. Fifty percent say their spending and savings habits are excellent and they have a budget to keep on track. Nearly 40% feel more in control of their finances than while they were married.

Nearly two-thirds of widows say they had a financial plan prior to losing their spouse, and 80% of this group worked with their spouse on that plan.

Fidelity’s study is based on a survey of 2,260 adults. Of this group, 1,503 were single women. MarketVision conducted the survey in May for Fidelity. The report can be downloaded here.

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