"Cheap" Shot? S&P Parent Sues Vanguard

June 8, 2000 (PLANSPONSOR.com) - Standard & Poor's parent McGraw-Hill has accused the ever-frugal Vanguard Group with breach of contract, trademark infringement and unfair competition in federal court. The charges are related to Vanguard's allegedly unpermissioned use of S&P proprietary indices and trademarks in conjunction with its proposed VIPER (Vanguard Index Participation Equity Receipts) exchange-traded funds (see FINANCE TRENDS).

While Standard & Poor’s currently has more than 400 license agreements covering clearly specified uses of S&P indices and marks, including agreements related to exchange-traded funds (ETFs), the complaint seeks to prevent Vanguard from using the trademarks in conjunction with Vipers or any other exchange-traded security.

It also seeks an order declaring Vanguard in material breach of their 1988 license agreement, as well as holding them liable for unspecified damages and attorneys’ fees.

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“Cheap” Shot?

The complaint contends that Vanguard tried to “shoehorn” its usage of S&P indices and trademarks within the scope of a 1988 agreement between the two firms, rather than expanding that license – and the fees it pays for such license – to include the new offerings. In a press release S&P says that while the new exchange-traded funds have been positioned as shares of existing open-end mutual funds (and covered by the prior agreement), they are different. They “exhibit all of the characteristics of shares of an ETF, which differ significantly in a number of ways from shares of the open-end mutual funds that Vanguard has offered under the 1988 agreement”.

“Standard & Poor’s indices are among the most recognized and respected investment benchmarks in the world and have grown in popularity thanks to the innovative work and creativity of our staff,” said Leo C. O?Neill, president of Standard & Poor’s. “This lawsuit seeks to protect the invaluable intellectual property and work product that we have spent decades creating.”

A Surprising Tactic

In a statement, Vanguard characterized the complaint as “baseless and without merit, and a surprising tactic.” Greg Barton, Managing Director and General Counsel of The Vanguard Group distinguished the proposed Vanguard offerings from other exchange-traded shares. ” There has been no change in the management of the Vanguard index funds or Vanguard’s use of S&P’s intellectual property. Rather, the exchange-traded shares represent merely a different form of distributing shares of our existing funds.”

Vanguard maintains that the VIPERs represent interests in the same funds already covered by S&P licenses – and intends to contest McGraw-Hill’s charges. If approved, the Vanguard Group ‘s recent filing for five exchange-traded versions of its stock index funds would be the first time a traditional fund had an exchange-traded class of shares.

– Nevin Adams                editors@plansponsor.com

In Sign of Times, Choice Debuts in Florida

May 8, 2000 (PLANSPONSOR.com) - Signalling a trend, Florida lawmakers Friday approved a bill to allow public workers a choice between their traditional defined benefit pension plan and a 401(k)-style plan.

The bill would affect nearly 650,000 state and local public employees. If Governor Jeb Bush signs it as expected, it will go into effect in 2002.

Wait and watch

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While smaller states have passed similar measures, the move in Florida drives home the trend among public funds to offer employees a choice among plans. Because of its sheer size – the Florida Retirement System has $103 billion under management – the state is also likely to be looked upon as the established leader and frontrunner in this field. “Defined contribution legislation is under consideration in other jurisdictions,” said Tom Herndon, Executive Director of the Florida Retirement System . “We know people will want to wait and watch our experience.”

Thomas Hughes, Senior Vice President of Fidelity Investments Tax Exempt Services Company , said Vermont, North Dakota, and Ohio have passed legislation creating similar plans. Montana and Arizona are considering it.

Nebraska Public Employees Retirement System’s state and county retirees have been in a savings plan since 1964. “The risk of losing money falls entirely on the employee,” noted Nebraska Legal Counsel Shawn P. Nowlan. “It’s a bigger step than plan sponsors like to think it is. You decrease the financial risk to the state, but increase the risk of litigation over inadequate participant education. I also wonder whether this trend would survive a serious stock market downturn.”

Choices, choices

If similar bills are passed nationwide, nearly 15 million governmental workers would be faced with a similar choice.
 
Herndon called the new 401(a) option “a good, workable plan that will offer significant benefits to some portions of the employee population. The general view is that defined contribution plans tend to favor younger employees, but we don’t have enough first hand experience yet.”

Workers can choose to remain in the defined benefit plan. Herndon said many computer models were run by Florida’s actuaries Milliman and Robertson to see how employees would fare under various scenarios.

In addition, workers who switch to the saving plan and change their minds are given a one-time opportunity to switch back. Legislation is being considered to limit the switch back window to the first five years after transition. A flood of retirees switching back if the markets turn sour near retirement would strain the system.

Pressures pro, con

Like other states, Florida lawmakers had to consider the following pressures in favor of the 401(a) plan:

  • Heavy lobbying by pension industry players like Fidelity Investments, Prudential Life Insurance Company, and TIAA-CREF.
  • Purported taxpayer savings on the costs of managing large state pension funds.
  • Reduced taxpayer liability for meeting financial obligations of traditional pensions.
  • Reported desire of some public employees to manage their own money.
  • Portability of retirement assets when employees switch jobs.

The move also has its critics, who see the following downsides:

  • Pressure from many employees who don’t want to undertake the responsibilities of savings plan investing.
  • Studies that show workers in traditional plans do significantly better financially than those in savings plans. 
  • The temptation on workers to cash out and spend their monies between jobs.
  • The added dangers to those public workers (about 25% nationwide) who do not pay into Social Security and will not draw benefits upon retirement.

Some $2 trillion currently is in public pension coffers in the United States at this time. A move to savings plans would swell existing 457 and 403(b) savings plans now in place.

– Ann Bidou       editors@plansponsor.com

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