Administration August 12, 2014

Institutional Plans See Increased Returns in Q214

August 12, 2014 (PLANSPONSOR.com) – Institutional plan sponsors gained almost 4% in the second quarter at the median, nearly doubling gains achieved during the first quarter, according to data from Northern Trust Universe.
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Institutional plans continued to benefit from gains in the domestic and international equity sectors, in addition to smaller gains in fixed income. During second quarter 2014, corporate ERISA plans (i.e., plans governed by the Employee Retirement Income Security Act) performed best among all plans with a return of 4.1%, compared with 2.8% during first quarter 2014.

Northern Trust data also found that public funds netted a gain of 3.9% at the median, an increase of 2% from the first quarter. Foundations and endowments followed with a return of 3.5% at the median in the second quarter, which was more than double the return in the first quarter. Corporate ERISA plans recorded their fourth consecutive quarterly gain, while both public funds, and foundations and endowments generated positive returns for the eighth straight quarters.

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The second quarter of 2014 also marked the twenty-first consecutive quarter without two consecutive quarters of negative median returns. Institutional plan sponsors have not experienced two consecutive quarters of negative median returns since the fourth quarter of 2008 and the first quarter of 2009. Over that five-year span, institutional plan sponsors have enjoyed a median return of just more than 12.5%, according to Northern Trust.

“The second quarter saw a sizable uptick in the median gain for all institutional plans,” says Bill Frieske, senior performance consultant, Northern Trust Investment Risk and Analytical Services, based in Chicago. “Strong earnings growth and low interest rates have given additional momentum to equity and bond markets, which have helped plan sponsors to continue their streak of quarterly gains. All asset classes performed well in the second quarter as three month returns suggest annual performance that will exceed long-term expectations.”

Asset allocation per segment during the quarter was as follows:

  • Public funds were weighted towards U.S. equity (32.6%) and international equity (22.9%);
  • Foundations and endowments were weighted towards private equity (23.1%) and U.S. equity (19.9%); and
  • Corporate ERISA plans were weighted towards U.S. fixed income (37.8%) and U.S. equity (29.3%).

Additionally, Northern Trust shows that during the second quarter, the median U.S. equity program returned 4.3%. International equities also had a robust quarter, returning 4.5%. In the alternative sector, private equity returned 4.2% in the quarter and real estate netted 3.3%. The fixed income sector returned 2.5%.

Corporate ERISA plans' second quarter performance was boosted by a combined 42% allocation to both international and U.S. equity markets. With public market returns performing so well over the last five years, Frieske says it is not surprising that corporate ERISA plans and public funds are outperforming foundations and endowments over that time period, given foundations' and endowments' heavier weighting towards alternatives.

The highest returning asset segment was mid-cap value, up 5.6%, while core fixed income was up a more modest 2%. At the larger end of the market-capitalization spectrum, growth beat value but at the mid- and small-cap end, value outpaced growth. Declining rates favored longer-duration over shorter bonds and higher risk high-yield and emerging market debt were the best of the best in fixed income.

Longer-term returns as of June 30 were:

  • ERISA: 17% (one-year), 10.5% (three-year), 13.4% (five-year);
  • Public funds: 17.1% (one-year), 10.2% (three-year), 13.4% (five-year); and
  • Foundations and endowments: 15.8% (one-year), 9.2% (three-year), 11.9% (five-year).

The Northern Trust Universe tracks the performance of about 300 large U.S. institutional investment plans, with a combined asset value of approximately $899 billion, which subscribe to Northern Trust performance measurement services.

Northern Trust Corporation is a provider of investment management, asset and fund administration, banking solutions and fiduciary services for corporations, institutions and affluent individuals worldwide.

More information about the firm is available at http://www.northerntrust.com.

Compliance August 12, 2014

Court Says RBC Executive Compensation Plan Is ERISA Plan

August 12, 2014 (PLANSPONSOR.com) – A federal court has found a wealth accumulation plan (WAP) offered to executives of RBC Capital Markets Corporation is a “pension plan” under the Employee Retirement Income Security Act (ERISA).
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The 5th U.S. Circuit Court of Appeals noted that a “pension plan” as defined by ERISA is “any plan, fund, or program . . . maintained by an employer . . . to the extent that by its express terms or as a result of surrounding circumstances such plan, fund, or program (i) provides retirement income to employees, or (ii) results in a deferral of income by employees for periods extending to the termination of covered employment or beyond, regardless of the method of calculating the contributions made to the plan, the method of calculating the benefits under the plan or the method of distributing benefits from the plan…” The appellate court disagreed with RBC’s argument that the two conditions must be taken together and said they are two separate conditions for determining whether a plan is a “pension plan” under ERISA.

The court agreed that the express purpose of the plan was not to provide retirement income, but found in the beginning of the WAP document, the statement of purpose refers to the WAP as a “deferred compensation plan” and explains that, by design, employees have the option “to defer receipt of a portion of their compensation to be earned with respect to the upcoming Plan Year.” In addition, later sections of the WAP contain provisions for both Voluntary Deferred Compensation and Mandatory Deferred Compensation. “A deferral of income therefore ‘ensues from’ (or, ‘arises as an effect of’) the express terms of the WAP,” the court concluded in its opinion.

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The court also found the express terms of the WAP contemplate employees deferring income “to the termination of covered employment or beyond.” The vesting sections explain that, upon separation, unvested amounts vest immediately. Also, the distribution sections mention available forms of distributions if a distribution is made due to separation.

For these reasons, the court determined the plan fell into the second condition for a plan to be a “pension plan” under ERISA. The court refused to consider RBC’s citing of a previous court case that applied a conditional clause found in another section of ERISA about pay being systematically deferred, noting that the plan in that case was a bonus plan and the WAP was clearly not a bonus plan.

The case was brought by former plan participants who had portions of their WAP accounts forfeited when they left their jobs at RBC. The plaintiffs alleged the forfeitures were violations of ERISA. But, a federal district court ruled that the plan was not an ERISA plan because its purpose was not to provide retirement income.

RBC had argued that, regardless of whether the WAP is a “pension plan” under ERISA, it is a “top hat” plan—a plan that is (1) unfunded and (2) maintained “primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees”—thereby making it exempt from the fiduciary duties imposed by ERISA. The district court did not address this argument.

However, the 5th Circuit found the resolution of the dispute over the “top hat” exemption—now that it determined the plan is a “pension plan” under ERISA—may require factual determinations regarding, for example, selectivity and high compensation. The appellate court remanded the case back to the district court to decide this issue.

The 5th Circuit’s opinion in Tolbert v. RBC Capital Markets Corporation is here.

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