Data and Research April 27, 2016

Only 7% of Plans Re-Enroll Participants

J.P. Morgan says both sponsors and participants are missing out on a great opportunity
Reported by

In a new white paper, “Retirement Reset: How re-enrollment can help strengthen U.S. retirement security,” J.P. Morgan Asset Management celebrates the advances that the Pension Protection Act brought forth when it was passed 10 years ago. Most notably, it paved the way for automatic enrollment and automatic escalation and the development of target-date funds and other appropriate asset allocation portfolios as the qualified default investment alternative (QDIA), J.P. Morgan says.

This has led to considerable progress for defined contribution (DC) plan participants—but the fact remains that “many Americans remain woefully unprepared for a retirement that may last upwards of 30 years,” the investment firm says.

As John Galateria, head of North America Institutional at J.P. Morgan, says: “The Pension Protection Act sets a strong foundation and made great strides, creating new opportunities for stronger DC plans and greater potential for increased retirement security. But the reality is the U.S. retirement system is still falling short. Although some progress has been made on the savings front, advances have been far more limited in getting participant assets allocated appropriately to help get them across the retirement finish line.”

NEXT: The value of re-enrollment

J.P. Morgan reminds plan sponsors of the value of re-enrollment, particularly into a TDF or age-appropriate asset allocation model. The white paper notes that “for plan sponsors, a re-enrollment can bolster confidence that participants are on a sensible investing path—and have a decent chance of staying on the path. Re-enrollment may also provide stronger protection from investing liability. We believe that for both participants and plan sponsors, re-enrollment offers clear, tangible benefits. This strategy quickly improves asset allocation for many participants, especially when the plan’s QDIA is a target-date fund.”

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J.P. Morgan looked at the returns of a TDF over a 25-year span starting in 1990 compared to a money market fund. Even with the downturn in 2008 and the subsequent lower returns in the U.S. equity market, the TDF portfolio strongly outperformed the money market fund.

Surprisingly, J.P. Morgan says, only 7% of plans have conducted a re-enrollment. In line with this, the firm urges plan sponsors to ensure that participants are saving enough and saving early enough—particularly as most sponsors default participants at a 3% average annual deferral rate.

In conclusion, J.P. Morgan says, “We are pleased to see that a growing number of asset managers have become strong public advocates of re-enrollment. We urge all plan sponsors, regardless of their chosen asset manager or recordkeeper, to work with their financial advisers/consultants and legal advisers to actively consider how re-enrollment can bolster their DC plans and may give their employees a better chance of a successful retirement.”

J.P. Morgan’s white paper, “Retirement Reset,” can be downloaded here.

Compliance April 27, 2016

ESOP Participants Failed to State Claim Under Fifth Third Standard

A district court found the requirement to allege an alternative action in a stock drop case applied to participants in a closely held company’s ESOP.
Reported by

Participants in the Hill Brother Construction Company, Inc. Employee Stock Ownership and 401(k) Plan and Trust (ESOP) failed to state a claim under the requirements of Fifth Third v. Dudenhoeffer that plan fiduciaries breached their duties by continuing to offer company stock in the plan, a court found.

U.S. District Judge Sharion Aycock of the U.S. District Court for the Northern District of Mississippi, noted that in the U.S. Supreme Court decision in Fifth Third, the high court said to “state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.”

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The plaintiffs in Hill v. Hill Brothers Construction Company, Inc. argued that because the business in Fifth Third was a publicly traded corporation, the same considerations and standards do not apply in their case, as Hills Brothers Construction (HBC) was a closely held corporation. In particular, the plaintiffs contend that the claim in Fifth Third was based on inside information that is not at issue here, and publicly traded corporations are subject to securities laws whereas non-public entities are not. Therefore, they assert there is no specific requirement to plead an ‘alternative action.’

However, in her opinion, Aycock said her reading of Fifth Third does not preclude application of the “alternative action” standard to closely held companies. In the Hill case, inside information is alleged to form the basis of the plaintiffs’ breach of the fiduciary duty of prudence, and Aycock found no securities law infringements are at issue or need to be balanced.

NEXT: Even if Fifth Third wasn’t applicable

Aycock concluded that the plaintiffs failed to allege an alternative action that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than help it.

She noted that even if the court did not find the Fifth Third standard to be applicable, the plaintiffs failed to state a claim pursuant to Iqbal and Twombly. The Supreme court in Twombly said, “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Iqbal used this standard.

Aycock noted that this means, although a complaint need not include detailed factual allegations, it must provide “more than an unadorned, the-defendant-unlawfully-harmed-me accusation. A pleading that offers ‘labels and conclusions’ or a ‘formulaic recitation of the elements of a cause of action will not do.’ And, that is what Aycock found the plaintiffs in Hill offered.

The case arose because in October of 2012, the plan participants received official written notice that the value of their retirement investment was approximately $19.8 million. HBC was valued by an outside evaluator at $16 million in early 2013. Within six months, however, HBC had ceased operations. On June 18, 2013, HBC employees were notified that their retirement savings amounted to zero.

The District Court’s opinion in the case is here.

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