Compliance November 21, 2016

Court Dismisses Retirement Plan Suit Against Disney

A participant in Disney’s retirement plan alleged that fiduciaries should have dropped a fund from the plan investment menu because one of its underlying investments showed signs of trouble.
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U.S. District Judge Percy Anderson of the U.S. District Court for the Central District of California has dismissed a lawsuit in which a participant in the Disney Savings and Investment Plan challenged plan fiduciaries’ continued offering of The Sequoia Fund as a plan investment option.

According to the complaint, the Sequoia Fund is a high cost mutual fund run by adviser Ruane, Cunniff & Goldbarb and its portfolio managers, Robert D. Goldfarb and David M. Poppe. The lawsuit claims that, in violation of plan investment policies, the fund managers concentrated The Sequoia Fund’s assets in a single stock, Valeant Pharmaceuticals, Inc.

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Anderson noted that generally, plaintiffs in federal court are required to give only “a short and plain statement of the claim showing that the pleader is entitled to relief.” However, in Bell Atlantic Corp. v. Twombly, the Supreme Court rejected the notion that “a wholly conclusory statement of a claim would survive a motion to dismiss whenever the pleadings left open the possibility that a plaintiff might later establish some set of undisclosed facts to support recovery.” Instead, Anderson said in his opinion, the court adopted a “plausibility standard,” in which the complaint must “raise a reasonable expectation that discovery will reveal evidence of [the alleged infraction].”

In construing the Twombly standard, the Supreme Court has advised that “a court considering a motion to dismiss can choose to begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth. While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations.”

Anderson also considered the Supreme Court decision inFifth Third Bancorp v. Dudenhoeffer. “As Dudenhoeffer instructs, the precipitous decline in the value of Valeant’s stock does not alone suggest that Plaintiffs have stated a plausible fiduciary duty claim against the Plan. The Consolidated Complaint contains no allegations of ‘special circumstances’ that could support even an inference that the Plan had any reason not to rely on the market’s valuation of Valeant up until the collapse in its price. More fundamentally, the Consolidated Complaint alleges no facts plausibly suggesting that the Plan had any reason to investigate the prudence of continuing to include the Sequoia Fund as one of the investment options for the Plan’s participants,” Anderson wrote in his opinion.

NEXT: Plaintiff presents an implausible theory

Anderson found it particularly implausible, under the plaintiff’s theory of liability, the implication that problems at Valeant, which the market price did not capture, somehow triggered the plan’s duty of prudence to remove the Sequoia Fund from the plan. “Without any factual allegations suggesting a situation that would cause a reasonably prudent fiduciary to remove the Sequoia Fund from the Plan’s investment options during the class period prior to the precipitous drop in Valeant’s stock price, and the resulting loss of value for the Sequoia Fund, Plaintiffs have failed to state a viable claim that the Plan breached its duty of prudence,” Anderson wrote.

He noted that the plaintiffs’ theory of liability, if accepted, would require plan fiduciaries to monitor the market and publicly available information about every holding maintained by every mutual fund included within the plan, the concentration of all stocks held by each mutual fund within the plan, and whether that concentration was the result of an imprudent acquisition of additional shares or the dramatic appreciation in value of any particular mutual fund’s original investment. “Plaintiffs have cited to no case that establishes that the duty of prudence imposes such obligations, and the Court concludes that such a duty would not be reasonable or appropriate in the context within which the Plan operated during the relevant time period,” Anderson concluded.

Although the plaintiff did not specifically request leave to amend, Anderson said she could have until December 5, 2016, to file a First Amended Consolidated Complaint. If she has not done so by that date, Anderson said he will issue a judgment dismissing the suit with prejudice.

The order for In re Disney ERISA Litigation is here.

Administration November 21, 2016

Questionable Future for Multiemployer Pension Plans

Milliman reports that multiemployer pension plans’ funded status has been steady so far in 2016, but its analysis shows questionable results for these plans going forward.
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The overall funding shortfall for all multiemployer plans in the Milliman Multiemployer Pension Funding Study – Fall 2016 analysis declined by about $1 billion for the six-month period ending June 30, 2016, while the aggregate funded percentage increased slightly from 75% to 76%.

The key assumption here is the discount rate used to measure liabilities, with each plan using its actuary’s assumed return on assets assumption. Assumed returns are generally between 6% and 8%, with a weighted average assumption for all plans of just below 7.5%. It is noteworthy that about 200 plans have decreased their assumed rate of return over the last several years, which contributes to an increase in the shortfall.

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Since the end of 2013, multiemployer plans have not been able to make additional progress in the wake of less-than-favorable investment returns in 2014, 2015, and the first half of 2016. In general, the funded status of these plans continues to be driven largely by investment performance.

The aggregate funded percentage of critical plans remains less than 60% as of June 30, 2016, while the funded percentage of noncritical plans is in excess of 80%. Since 2015, the estimated funded percentage projection for critical plans has leveled off while the line for the non-critical projection plans has increased slightly.

Since Milliman’s first study as of December 31, 2013, the percentage of plans in critical status has remained consistent at about 25% of all plans. The number of plans that are less than 65% funded showed little change and continues to account for more than half of the aggregate deficit for all multiemployer plans of $150 billion. Starting with 2014 Internal Revenue Service (IRS) Form 5500 filings, new information is provided for critical plans. Milliman reviewed the new statistics for the 320 critical plans in its study for which this information is available. Of these, 40% are projected to become insolvent at some point, while the remainder are projected to emerge from critical status in the future.

NEXT: Can multiemployer plans be saved?

Looking ahead, the $41 billion shortfall for plans headed toward insolvency is likely to increase, short of sustained excess returns, significant contributions increases, or benefit suspensions that may be adopted under the Multiemployer Pension Reform Act of 2014 (MPRA). While some plans may become eligible for suspensions and decide to pursue these changes, it is still too early to gauge the impact they might have on the health of those plans or whether they can gain approval from the U.S. Treasury Department first, and then their participants, Milliman says.

The firm notes that the Central States Teamster Fund application for suspensions was denied by the Treasury; therefore, the fund will not make another application. This fund alone represents almost $20 billion of underfunding, approximately half of the above $41 billion.

So what happens if market returns do not improve? Can funds survive without better asset performance? In the aggregate, the return for the rest of 2016 needs to be 3% to remain at the current 76% funded percentage level. A strong 9% return for the second half of the year would result in aggregate funding greater than 80%, while a poor -3% return would pull it down toward 70%. The return for Milliman’s sample portfolio for the third quarter of 2016 was more than 3%. That result has the potential to place the aggregate funded percentage on the middle prong at the end of 2016.

The future health of most multiemployer plans very much depends on investment performance, Milliman notes. For critical plans, persistent strong returns will likely be needed to recover. For critical and declining plans, prospects for MPRA benefit suspensions and/or partitions may offer some relief. Failing that, such plans may end up relying on assistance from the Pension Benefit Guaranty Corporation (PBGC), which is facing its own financial issues. 

Healthier plans face the risk of increased PBGC premiums and trustees for these plans need to be vigilant in monitoring the financial trends and risk exposures, Milliman suggests. Trustees may also want to explore potential plan design changes such as variable annuity plans (e.g., a Sustainable Income Plan), which could mitigate the negative impact of future market volatility.

Milliman’s report is here.

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