Citigroup Proprietary Fund Suit Gets Class Certification

Before certifying a class in the litigation, a federal judge determined that the named plaintiffs need not have invested in all funds challenged in the suit in order to represent 401(k) participants that invested in the funds.

A federal judge has granted class certification in a lawsuit alleging Citigroup violated its fiduciary duties under the Employee Retirement Income Security Act (ERISA) by offering and keeping affiliated funds in its 401(k) plans when better-performing, lower-cost funds were available.

In 2014, U.S. District Judge Sidney H. Stein of the U.S. District Court for the Southern District of New York found the participants’ claims were not filed outside ERISA’s statute of limitations. In 2015, a third lead plaintiff was added to the suit and Stein rejected arguments from defendants that the new plaintiff did not fall within the statute of limitations. In his latest order, he revised his previous decision and struck the third plaintiff as a named plaintiff in the lawsuit.

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Also, before moving on to the matter of class certification, Stein addressed the defendants argument that the remaining two named plaintiffs did not have standing to bring claims regarding affiliated funds in which they did not invest.  Of the nine affiliated funds through which they allege the plan suffered losses, the two lead plaintiffs only invested in one.

Citing prior case law, Stein said that in the context of class actions, a named plaintiff who has constitutional standing to raise claims based on his own injuries may also have “class standing” to assert “other claims, unrelated to those injuries,” on behalf of unnamed class members. “The fact that only some of these alleged losses manifested themselves in the named plaintiffs’ individual accounts does not deprive plaintiffs of their standing to seek redress on behalf of the Plan for the broader injuries the Plan incurred. Proving the ‘interrelated and overlapping’ duty of prudence and loyalty claims that are at issue in this case will require an inquiry into defendants’ conduct in managing the Plan, which plaintiffs allege was uniform and not dependent on the idiosyncratic characteristics of any proprietary funds,” he wrote in his order.

In addressing each of the factors for determining class certification, Stein agreed with defendants that some of the questions enumerated by plaintiffs are inadequate to establish commonality. For example, the claim that the affiliated funds’ fee were excessive compared to alternatives requires fund‐by‐fund analysis and cannot generate answers that are common to the entire class plaintiffs seek to represent, he said. However, he found that plaintiffs have established commonality by identifying at least two questions that are capable of class-wide resolution: whether the defendants improperly favored proprietary funds in order to benefit Citigroup at the expense of plan participants, and whether the defendants failed to prudently and loyally monitor the plan’s investments.

Stein also addressed the defendants’ argument that commonality is not met because some class members’ knowledge may fall outside of ERISA’s statute of limitations. Citing prior case law, he said “bald speculation that some class members might have had knowledge cannot be enough to forestall certification.” In addition, Stein said the basis of defendants’ speculation—that class members, who are or were Citigroup employees, would be aware that the affiliated funds were proprietary and would also be privy to their expense ratios—does not suffice to establish the kind of “specific knowledge of the actual breach of duty” required to start the clock on ERISA’s three‐year limitations period.

Finally, Stein rejected the defendants’ argument which suggested the fact that Citigroup employees “routinely” sign releases waiving all claims against Citigroup, including claims brought under the ERISA statute, precludes certification. “In cases brought on behalf of a plan, most courts have held that ‘individuals do not have the authority to release a defined contribution plan’s right to recover for breaches of fiduciary duty;’ the consent of the plan is required for a release of 29 U.S.C. § 1132(a)(2) claims,” he wrote in his motion.

According to the motion, the class that the plaintiffs seek to have the court certify extends from October 18, 2001, to September 4, 2007. September 4, 2007, is the date on which defendants removed all of the affiliated funds except the Citi Institutional Liquid Reserves Fund from the plan. However, none of the affiliated funds were actually managed or offered by Citigroup affiliates after December 1, 2005—the date on which Citigroup sold its asset management business to Legg Mason. So, Stein agreed with the defendants that none of the claims in the case are viable after December 1, 2005.

He certified a group of all participants in the Citigroup 401(k) plan who invested in any of the nine affiliated funds from October 18, 2001, to December 1, 2005, excluding the defendants, their beneficiaries, and their immediate families.

Working Longer Could Boost Retirement Security

However, research finds workers with a lower socioeconomic status have a harder time staying in the workforce.

Remaining in the workforce for as long as feasible benefits workers in three main ways, the Center for Retirement Research at Boston College maintains in a new issue brief, “Is Working Longer a Good Prescription for All?” It gives people a longer time frame in which to save, it increases their Social Security benefits and it shortens the number of years, and therefore the resources, they will spend in retirement.

The Center decided to examine whether it is possible for those of a lower socioeconomic status (SES), i.e. those who are less educated, to remain in the workforce, and found that they have fewer options available to them than those of a higher SES.

However, the Center also found that both men and women in a lower SES have seen their life expectancies increase by fewer years than those of a higher SES between the years 1979 and 2011. Among 65-year-old men in the lowest income quartile in 1979, their life expectancy was 77.5 years. That increased by a full four years to 81.5 in 2011. However, among the highest income quartile 65-year-old men in 1979, their life expectancy was 78.9 and that increased by 6.1 years to 85.0 by 2011.

For the lowest-income quartile 65-year-old women in 1979, their life expectancy was 82.3. By 2011, that had increased by 1.7 years to 83.7. By comparison, for the highest-income quartile 65-year-old woman in 1979, their life expectancy was 83.4, and by 2011, that had increased by 3.2 years to 86.6.

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The Center says that the significance of this data is that while lower SES individuals have a harder time remaining in the workforce, their longevity has not increased as much as it has for higher SES individuals.

However, one solution that could help individuals remain in the workforce longer would be to switch to a job better suited to working longer, and this is equally true for people with no college education and those with some college education or a college degree, the Center says. The Center found that for those with no college education, the probability of remaining in the workforce to age 65 increased by 7.5%, and for those with some college education, it increased by 10.9%.

The downside to this is that by moving into a new industry, they lose their seniority and, possibly, open themselves up to job loss. And this risk could be higher for less-educated workers, the Center says. Additionally, job options become fewer for those age 50 and older, although options for older workers have increased since the late 1990s.

The Center then examined what policymakers could do to help people remain in the workforce longer, starting with lowering the cost of their health insurance, which, the Center says, is about five times the cost of insurance for younger workers. The Center says that some states have limited how much insurance companies can increase premiums by age, and some have even mandated that insurance companies do not consider age at all when setting premiums. The Center then studied whether such initiatives actually help people remain in the workforce longer and found that they do not. The only benefit was that high school graduates saw their wages increase.

The Center concludes that policymakers should find ways to help people remain in the workforce longer other than lowering their health insurance costs. The Center for Retirement Research’s brief can be downloaded here.

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