Compliance July 20, 2022

ERISA Lawsuit Levelled at Another Health System

The complaint alleges that an imprudent fiduciary process resulted in the selection and maintenance of several funds in the plan that ‘wasted assets because of unnecessary costs.’

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A proposed class of plaintiffs has filed a new Employee Retirement Income Security Act lawsuit in the U.S. District Court for the District of Minnesota, naming as defendants the North Memorial Health Care system and its board of directors.

The lawsuit includes similar allegations to the many ERISA lawsuits that have been filed in recent years against large health care systems across the U.S., but it stands out for the comparatively small size of the defendant.

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According to the complaint, the 401(k) plan at the heart of the lawsuit had at least $286 million in assets under management at all times during the proposed class period. At the end of the plan’s fiscal year in 2020, the plaintiffs claim, it had over $465 million in net assets under management—considerably less than the billions of dollars in assets in the retirement programs of many other health care systems that have come under legal attack.

In an attempt to support allegations that the fiduciaries of the NMHC 401(k) plan acted imprudently, the complaint refers to an unrelated case in which Transamerica, the plan’s recordkeeper for five of the six years of the proposed class period, had to settle charges leveled by the Securities and Exchange Commission.

“Transamerica made material misstatements of fact to investors and potential investors, engaged in business practices which operated as a fraud or deceit upon clients or prospective clients, failed to reasonably supervise the variable annuity recommendations its agents were making, and failed to reasonably supervise the 529 plan share-class recommendations that its agents were making, among other violations,” the complaint states. Transamerica is not named as a defendant in the lawsuit.

The plaintiffs suggest the defendants’ breaches of their fiduciary duties related to their overall decisionmaking resulted in the selection and maintenance of several funds in the plan that “wasted assets because of unnecessary costs.”

“Another indication of defendants’ failure to prudently monitor the plan’s funds is that several funds during the class period were more expensive than comparable funds found in similarly sized plans,” the complaint states. “Simply put, a fiduciary to a large defined contribution plan such as the plan can use their asset size and negotiating power to invest in the cheapest share class available. The total assets under management for all of these funds was over $460 million, thus easily qualifying them for lower share classes.”

The complaint states defendants knew or should have known of the existence of identical, less expensive share classes, and thus should have immediately identified the prudence of transferring the plan’s funds into these alternative investments. It says there is no good-faith explanation for utilizing high-cost share classes when lower-cost share classes are available for the exact same investment.

The emergence of the new complaint comes at a time that some retirement industry compliance experts see as a possible litigation inflection point thanks to recent appellate and Supreme Court rulings. Beyond the emergence of potentially influential precedents, the pace of filings in 2022 has been quite brisk, with at least 25 cases filed in the first four months of the year. One expert anticipates that anywhere from 75 to 100 cases will be filed by the end of 2022.

Data and Research July 19, 2022

Workforce Challenges for State and Local Employers

State and local governments’ workforce challenges have been worsened by the COVID-19 pandemic and the Great Resignation, a survey shows.

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Among the state and local government workers included in MissionSquare Research Institute’s State and Local Workforce Survey 2022, 53% are accelerating their retirement plans and 17% are postponing their retirement dates, the highest such numbers in over a decade.

In 2009, the first year of the survey, 44% of municipal workers hastened their retirements and 12% delayed, according to data presented in “Achieving Workforce Diversity, Equity, and Inclusion in Local Government,” an International City/County Management Association webinar covering MissionSquare’s research.

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From the pre-pandemic peak in staffing levels in February 2020, total state workforces are down 1.9% and local workforces have decreased 4.1%, the MissionSquare survey found.

Contributing factors include the available labor supply, fiscal uncertainty for coming years, compensation structures and the underlying demographics of the public-sector workforce, explained Joshua Franzel, managing director at MissionSquare Research Institute, during the webinar.

“There’s been an uneven recovery at the and local state level, by industry as well,” Franzel said, presenting the research that he coauthored. “For example, state education is more or less recovered, state hospitals have more or less recovered, but state general administration is well below pre-pandemic levels. On the local side, pretty much all major industry levels remain below peak February 2020 levels: education, utilities, transportation, hospitals [and] general administration all remained below where they were.”

The survey found that retirements were higher than in 2020 for 60% of respondents, while they were the same for 32% and lower for 8%. Among employers, layoffs—excluding terminations— were higher than in 2020 for 6% of respondents, and were the same for 52% and lower for 41%. The research also found that 59% of state and local government employers do not feel their employees are financially prepared for retirement. 

Employee separations are elevated across state and local government employees, as 69% of respondents said that quits—voluntary non-retirement separations—are higher than in 2020, while 26% said it is the same and 5% reported a lower figure.  

Among state and local governments, 81% have hired new employees, according to 2022 data. The next most prevalent change reported was broad-based pay increases, at 38%, followed by 37% of employers that hired temporary or contract workers and 31% that updated job specifications for minimum education and skills. Tied at 25% were changes to permanent or long-term telework options, travel or training restrictions and rehired staff that had retired, the survey found. 

The  is a national nonprofit organization representing state and local governments. It administers and manages 457, 403 and 401 retirement plans for the benefit of public-sector employers and employees. Data from the MissionSquare Research Institute survey was gathered in collaboration with the International Public Management Association for Human Resources and the National Association of State Personnel Executives. The survey was conducted this year from March 3 to April 24. There were 319 state and local government human resources staff respondents.

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