Genworth Can Appeal Class Action Regarding BlackRock TDFs

The 4th Circuit Court of Appeals will consider Genworth’s argument against class certification previously granted by a district court. 

The U.S. 4th Circuit Court of Appeals will hear Genworth Financial Inc.’s appeal of a decision to give class action status to a group of participants who were invested in BlackRock Inc. target-date funds through their Genworth retirement plan. 

Plan sponsor Genworth had requested the chance to appeal the class action certification granted by the U.S. District Court for the Eastern District of Virginia. In that ruling, U.S. District Judge Judge Robert Payne gave class action status to all participants enrolled in the BlackRock LifePath Index Funds at any time on or after August 1, 2016, without giving a ruling on the plaintiffs’ allegations that Genworth’s retirement plan committee had failed in its fiduciary duty by not shopping for alternatives to those funds. The Genworth 

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The granting of class action status in the case, Trauernicht et al. v. Genworth Financial Inc. et al., stood out after numerous lawsuits filed by the same law firm, Miller Shah, had been dismissed by other courts. 

In its appeal filed August 30, Genworth argued that the plaintiffs had not sufficiently argued for class action status in the lawsuit. The firm, represented by Gibson, Dunn & Crutcher LLP, made the case that many of the “thousands of participants and beneficiaries” that would make up the class may in fact have “fared worse under Plaintiffs’ preferred alternative investments, depending on different individuals’ choices of when and how to invest.”  

Genworth also argued that granting class status would have far-reaching consequences for Employee Retirement Income Security Act fiduciary-breach cases, making such class certification a “fait accompli,” according to the appeal. 

“That includes cases like this that are manifestly unfit for mandatory classes because they purport to resolve the rights of unharmed class members who will never even receive notice and the chance to opt out of the wasteful, attorney-driven litigation prosecuted in their names,” Genworth’s attorneys wrote in the request for appeal. 

Genworth also accused the district court of erring when it did not decide if “any, let alone all” of the class members had standing for the allegations of fiduciary breach. 

In his class certification ruling, Payne had not made a judgement on the merits of the complaint, finding only that there was enough to provide class status.  

“Demonstrating financial injury in the context of standing is different than in the context of the merits,” he wrote. “Plaintiffs do not have to prove that they have suffered financial injury to establish standing. … Rather, standing is a threshold inquiry to determine whether the court may proceed to the merits.”  
 
The 4th Circuit, in its order Friday, wrote that Genworth made enough of a case for the appeals court to review the class certification status before allowing the case to move ahead. 

The Genworth 401(k) plan held assets of $847.34 million as of December 31, 2023, according to its most recent Form 5500 filing.

Morningstar to Change Medalist Rating Methodology for Managed Investments

The firm expects about 20% of funds to see changes in their ratings, most of which will be downgrades, as a result of the methodology change.

Morningstar Inc. has announced plans to change the methodology of its Morningstar Medalist Rating—a five-tier system designed to evaluate an investment’s strategy potential to outperform a relevant index or peer group over the long term.

The “enhancement,” as Morningstar terms the changes, which will begin to take effect on October 29 and involves changing the way Morningstar estimates how much value a managed investment can add before fees. As plan sponsors evaluate investment options to add to their plan menus, it is important they are aware of the change in Morningstar’s ratings if this is a benchmark on which they rely.

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According to the announcement, the enhancement will “refine Morningstar’s framework for forecasting future returns,” but the firm is maintaining its same process for assigning ratings.

Jeff Ptak, Morningstar’s chief ratings officer, says the firm reserves its highest ratings for active funds that it believes are capable of delivering value to investors net of fees, adjusted for risk.

“We want to make sure that when we are assigning ratings to managed investments, we’re doing so in the most efficacious way possible because … it’s going to make the ratings more reliable,” Ptak says.

Specifically, Morningstar will begin subtracting a managed investment’s fees from the estimate of how much value the investment can add before fees. The difference, which represents how much value a managed investment can add after fees, will determine the Medalist Rating Morningstar assigns.

Ptak provided an example of how a fund might be impacted by the methodology change. If a fund was projected to have the potential to deliver 1.5% per year in value to investors before fees and adjusted for risk and charges a 1% expense ratio, the net value add to the investor after fees would be 50 basis points per year. But if Morningstar cuts its estimate of how much value the fund can deliver before fees from 1.5% to 0.75%, with the same 1% expense ratio, Ptak says now the fund cannot deliver any value net of fees.

With the new methodology, Morningstar expects about 20% of rated funds to see a rating change, and most of those will be downgrades. Gold, Silver and Bronze ratings are projected to account for about 23% of rated global funds, down from about 30% today.

Ratings are assigned on a scale that ranges from Gold (the top rating) to Negative (the lowest) based on an evaluation of how much value a managed investment can add compared to its assigned benchmark after fees and three pillars—people, process and parent—that determine Morningstar’s conviction on a particular investment strategy.

Ptak adds that it is not unusual for Morningstar to update its methodology for ratings; it last made changes in 2019.

“We’re encouraged by what we’ve seen from the medalists ratings so far,” Ptak says. “It’s done a good job of sorting funds based on their future performance, but we aspire to an even higher standard.”

He adds that the types of funds that will likely see the biggest impacts from the methodology change are equity funds and allocation funds; fixed-income funds are expected to see fewer changes. Morningstar is moving away from an approach focused on dispersion and more on the “likelihood and magnitude of success,” he says.

“Allocation funds are funds that invest across multiple asset classes, but typically equities are the biggest sleeve in those types of strategies,” Ptak explains. “So even though they invest partially in fixed income, you are going to see a wider dispersion of outcomes in those than you would in a bond fund.”

Overall, Ptak says Morningstar expects to see higher-rated funds—those that earn the Gold, Silver or Bronze rating—to see more changes than lower-rated funds. With Gold-rated funds, Ptak says he is expecting around 40% of those to see downgrades as result of the methodology change.

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