Compliance September 9, 2019

Lowe’s Defense Fails to Get ERISA Suit Dismissed

The fiduciary breach lawsuit accuses plan fiduciaries of mapping $1 billion into a fund that lagged peer performance and was unpopular in the marketplace.

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Following recommendations from a Magistrate Judge a federal judge from the U.S. District Court for the Western District of North Carolina granted in part and denied in part Lowe’s Companies’ motion to dismiss an Employee Retirement Income Security Act (ERSIA) lawsuit.

The core of the fiduciary breach complaint is summarized as follows in case documents: “Lowe’s imprudently selected and retained the Hewitt Growth Fund for the Plan, in consultation with Hewitt (which served as the plan’s fiduciary investment consultant), despite the fact that (1) the Hewitt Growth Fund was a new and largely untested fund at the time it was added to the plan; (2) the Hewitt Growth Fund was underperforming its benchmark at the time it was added to the plan and continued to underperform after it was added to the plan; and (3) the Hewitt Growth Fund was not utilized by fiduciaries of any similarly-sized plans and was generally unpopular in the marketplace.”

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According to the text of the complaint, defendants placed $1 billion of the Lowe’s 401(k) plan’s assets into the new fund. At least some of the money, plaintiffs allege, was inappropriately reallocated from eight existing funds in the plan, “which were generally performing well,” when the Hewitt Growth Fund replaced these options on the investment menu.

The decision comes after the District Court conducted a de novo review of Magistrate Judge David C. Keesler’s formal memorandum and recommendation (M&R) issued in this matter. For his part, Judge Keesler recommended that the Lowe’s motion to dismiss be denied, which in turn sparked the defendants’ to file an objection to the magisterial memorandum and recommendation.

In arguing against the Magistrate Judge’s recommendation, the Lowe’s defendants asserted a variety of objections, including that the M&R inappropriate applied a relaxed pleading standard derived from an 8th U.S. Circuit Court of Appeals opinion that has not been adopted by the 4th Circuit. The defense also challenged the finding that Lowe’s had any fiduciary duty for selecting or monitoring investment choices.

The text of the new decision examines each of six distinct objections individually.

On the first objection, U.S. District Judge Kenneth D. Bell explained that the Lowe’s defendants contend that the Magistrate Judge improperly applied Braden v. Wal-Mart Stores to create a lower pleading standard for ERISA cases. However, Bell stated that Braden does not create a lower pleading standard for ERISA cases.

“Rather, Braden simply stands for the proposition that courts should draw all reasonable inferences from the totality of the allegations, and not dismiss ERISA claims because the complaint fails to allege all the specifics of the conduct that leads to the breach of fiduciary duty,” Bell wrote. “In any event, notwithstanding the Magistrate Judge’s citation of Braden, the [District Court] has undertaken a careful and holistic evaluation of the complaint as a whole in accordance with Iqbal and Twombly.”

A similar result was reached after consideration of the objection that Lowe’s status as a fiduciary to the plan can be disputed.

“Because the 4th Circuit has expressly stated that a fiduciary may either be formally designated or exist by nature of de facto performance, the plan document is not dispositive of Lowe’s status as a plan fiduciary,” the decision states. “Further, the [District Court] agrees with prior decisions in this district that whether plaintiff will be able to show the requisite degree of control over the plan is a question to be addressed at later stages of this action. Therefore, the Court will not dismiss Count I on the grounds that plaintiff failed to adequately plead that Lowe’s is a de facto fiduciary of the plan.”

One area where the new decision sides with the Lowe’s defendants has to do with its monitoring of Aon Hewitt. In short, Bell agreed with Lowe’s argument that the M&R is “incorrect in finding that plaintiff has stated a claim against Lowe’s for failure to monitor Aon Hewitt.”

“The plan document provides that the administrative committee, not Lowe’s, has sole authority to appoint Aon Hewitt,” Bell wrote. “While Lowe’s admittedly has the obligation to monitor the fiduciaries it appoints directly, it stretches the bounds of the duty to monitor too far to hold Lowe’s responsible for monitoring every fiduciary employed by the plan, including those fiduciaries which the plan explicitly envisions being appointed by the administrative committee. Accordingly, Count II is dismissed to the extent that it is based on a claim that Lowe’s had a duty to monitor Aon Hewitt.”

With this logic in mind, Lowe’s motion to dismiss Count II was denied to the extent it alleges that Lowe’s failed to monitor the administrative committee, but granted to the extent it asserts claims against Lowe’s for the failure to monitor Aon Hewitt.

Administration September 9, 2019

DB Plan Funding Takes a Hit From Record-Setting Low Interest Rates in August

Pension plans that have invested in long bonds would have benefited, according to Northern Trust Asset Management, and Legal and General Investment Management America suggests market volatility can be risk-managed and controlled to a specific target with the use of an overlay.

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The estimated aggregate funding level of defined benefit (DB) pension plans sponsored by S&P 1500 companies decreased by 4% in August 2019 to 82%, as a result of a decrease in discount rates and equity markets, according to Mercer.

As of August 31, the estimated aggregate deficit of $451 billion increased by $129 billion as compared to $322 billion measured at the end of July.

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The S&P 500 index decreased 1.81% and the MSCI EAFE index decreased 2.88% in August. Typical discount rates for pension plans as measured by the Mercer Yield Curve decreased from 3.38% to 2.95%.

“Funded status dropped sharply in August with interest rates now at their lowest point in modern history,” says Matt McDaniel, a partner in Mercer’s Wealth business. “Interest rates decreased dramatically during August with the 30-Year Treasury falling to an all-time low at under 2%. The yield curve inverted, which has historically signaled an impending recession, and equity returns for August were negative as well.”

According to McDaniel, “Plan sponsors who banked recent gains and de-risked effectively are now in a much better position for having done so. The current environment leaves us with a puzzling dilemma: where to invest when most asset classes look expensive. With historically low interest rates and a potential market correction on the horizon, it’s more important than ever for plan sponsors to evaluate their risk management plans and adjust as necessary.”

Legal and General Investment Management America (LGIMA) suggests while sponsors are certainly focused on expected return, a significant driver of allocation decisions is based upon expected volatility. However, plans often realize a much different level of volatility than originally expected. Market volatility can be risk-managed and controlled to a specific target with the use of an overlay.

LGIMA estimates that the average plan’s funding ratio fell 5.4% to 76.9% through August. The Treasury component decreased by 55 basis points while the credit component widened 13 basis points, resulting in a net decrease of 42 basis points. Overall, liabilities for the average plan increased 6.67%, while plan assets with a traditional “60/40” asset allocation decreased by approximately 0.36%.

According to Wilshire Consulting, the aggregate funded ratio for U.S. corporate pension plans decreased by 3.8 percentage points to end the month of August at 81.3%.

It says the monthly change in funding resulted from a 7% increase in liability values partially offset by a 2.1% increase in asset values. The aggregate funded ratio is estimated to be down 6.2 and 11.4 percentage points year-to-date and over the trailing twelve-months, respectively.   

“August’s decrease in funded ratio was driven by the perfect storm of economic forces for corporate pension plans: falling discount rates and negative equity returns,” says Ned McGuire, managing director and a member of the Investment Management & Research Group of Wilshire Consulting.  “August’s 3.8 percentage point decrease in funded ratio is the second largest monthly decrease this year and fourth monthly decrease in 2019.”

The funded status for DB plans that were not hedged likely decreased significantly for the month, according to River and Mercantile’s September Retirement Update.

It says discount rates plummeted in August, dropping 0.44%. Current rates are now down 1.22% since year end 2018 and are 1.07% lower than rates from this time last year. The FTSE pension discount index finished August at 3%. Global equity markets were down, while bond markets rallied due to the flight to safety. On August 14, the yield curve inverted and equity markets experienced the worst trading day so far this year. In the month, emerging markets were hit the hardest, falling 4.9%, while the U.S. and international developed markets trailed by 2% and 2.6%, respectively.

Both model plans that October Three tracks lost ground last month, ending August at the low point for the year. Plan A lost more than 5% last month and is now down almost 7% for the year, while Plan B lost more than 1% and is now down 1% through the first eight months of 2019. Plan A is a traditional plan (duration 12 at 5.5%) with a 60/40 asset allocation, while Plan B is a largely retired plan (duration 9 at 5.5%) with a 20/80 allocation with a greater emphasis on corporate and long-duration bonds.

Brian Donohue, partner at October Three Consulting, says corporate bond yields hit new all-time lows during the month. “Pension liabilities increased 4% to 6% in August and are now up an astounding 15% to 25% for the year, with long duration plans seeing the largest increases.”

Looking to the future, Donohue says, “Pension funding relief has reduced required plan funding since 2012, but under current law, this relief will gradually sunset. Given the current level of market interest rates, it is possible that relief reduces the funding burden through 2028, but the rates used to measure liabilities will move significantly lower over the next few years, increasing funding requirements for pension sponsors that have only made required contributions.”

According to Northern Trust Asset Management (NTAM), the average funded ratio of corporate pension plans declined in August from 86% to 82.5%. It also says both negative returns in the equity market along with higher liabilities led to lower funded ratio. According to NTAM, global equity market returns were down approximately 2.4% during the month, and the average discount rate decreased from 2.99% to 2.56% during the month.

Jessica Hart, head of OCIO Retirement Practice, notes, “Recession fears have escalated as the yield curve inverted and trade tensions escalated. Pension plans that have invested in long bonds would have benefited from its favorable performance as rates at the long end of the curve have declined.”

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