Administration December 18, 2023

Pennsylvania PSERS Ends Contract With Aon, Certifies Decrease in Contribution Rates

Certain public school employees will also benefit from a reduction in the mandatory employee contribution rate to the pension fund.

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The Board of Trustees of the Pennsylvania Public School Employees’ Retirement System voted Friday to terminate its contract with Aon Investments USA Inc. The board also certified a decrease in the plan’s employer contribution rate and lower payroll contribution rates for certain employees.

In August, PSERS filed a lawsuit against Aon over accounting errors made in a 2020 risk share analysis, alleging the firm hurt the pension fund’s reputation and caused millions of dollars in damaged. The Aon miscalculations led to the resignation of PSERS’ executive director, Glen Grell, and its CIO, Jim Grossman, as well as a Department of Justice investigation that lasted more than a year before finding no wrongdoing.

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Because the board terminated its contract with Aon, services previously provided by Aon will now be performed, in full, by Verus Investments.

In other business, the annual employer contribution rate will decrease to 33.9% from the current rate of 34%, according to the board’s actuarial firm, Buck Global LLC. The new rate starts in the fiscal year that runs from July 1, 2024 through June 30, 2025, and certain employee groups’ lower payroll contributions run over the next three fiscal years, from July 1, 2024 through June 30, 2027.

“This is the second year in a row the [employer contribution rate] has gone down, and the Retirement Code requires the Board to accept the actuary’s calculation,” said Eric DiTullio, a PSERS trustee representing public schools boards and the chair of its finance and actuarial committee, in a statement. “There’s no guarantee those declines will continue in the future. Still, as an elected school board member, I’ll take an [employer contribution rate] reduction, no matter how slight, over an increase every day of the week.”

According to Buck, the decline in employer contribution rate was caused largely by school employers’ strong payroll growth and favorable demographic changes involving salary increases, mortality and retirements during the recently ended 2022 to 2023 fiscal year.

Those factors, along with sustained, actuarially required employer contribution rate funding, caused a $1.6 billion decrease in PSERS’ long-term unfunded actuarial liability, the largest year-to-year decline in more than a decade and a half. At the same time, PSERS’ actuarial funded status rose to 63.6% from 61.6%, according to Buck.

The vast majority of the employer contribution rate in the fiscal year that runs from 2023 into 2024 also will cover approximately 80% of debt payments for past service (unfunded liability). Compounded by higher-than-expected payroll growth, PSERS was able to make “significant and positive progress in paying down this debt,” according to a press release.

Buck estimated that total employer contributions to PSERS will be $5.3 billion in fiscal year 2025. Pennsylvania directly reimburses school employers for at least half of the total employer contribution rate payment.

PSERS is also funded through net investments earnings, which totaled $2.8 billion in fiscal 2023.

Mandatory employee contributions are the third funding source for PSERS, and employee contribution rates range from 5.25% to 10.30% of pay, depending on employees’ membership class in the pension fund and when they joined PSERS.

In addition to the decline in employer contribution rate, the employee contribution rate will also drop. Beginning in July, 116,851 public school employees who began their careers will pay 0.5% or 0.75% less for their retirement benefits. This reduction was caused by net investment returns exceeding a statutory threshold in the calculation of the shared risk/shared gain contribution rate.

The shared risk/shared gain contribution rate is mandated by Act 120 of 2010 and Act 5 of 2017 in Pennsylvania law. Under those laws, certain member contribution rates for the defined benefit plan may fluctuate up or down every three years depending on a periodic review of the pension fund’s net investment performance.

“The lower employee contribution rate is welcome news for our hardworking school employees,” said Stacy Garrity, Pennsylvania’s treasurer and a PSERS trustee, in a statement. “The Audit, Compliance and Risk Committee, which I chair, oversaw and directed a robust, independent examination of PSERS’ net investment returns, and we’re confident in the work of ACA and the results we received.”

As of June 30, PSERS had total net assets of $72.8 billion and a membership of about 251,000 active school employees, 250,000 retired school employees and 27,000 vested inactive members.

Compliance December 15, 2023

Clorox Files for Dismissal of Complaint Over 401(k) Forfeitures

The company's motion defends the plan's actions, stating that the committee followed IRS guidance and outlined its use of forfeitures in plan documents.

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Plan sponsor, the Clorox Co. filed a motion to dismiss a proposed class action suit alleging it violated federal benefits law by using 401(k) forfeitures to reduce company contribution costs instead of defraying costs for plan participants.

Participant James McManus filed the complaint against the Clorox Co. and the fiduciaries of the Clorox Co. 401(k) Plan in U.S. District Court for the Northern District of California on October 18. The filing alleges that plan fiduciaries consistently used forfeited funds exclusively for the company’s benefit by reducing company contributions to the plan, instead of by reducing administrative expenses that are passed on to participants.

According to the complaint, from 2017 to 2022, company nonelective contributions to the plan were reduced by a total of $5.7 million as a result of Clorox’s reallocation of forfeited funds. The class action is seeking to recoup any amount the court would find was improperly used, along with litigation fees.

On Wednesday, Clorox filed a motion to dismiss the case on the grounds that the plan committee had laid out the use of forfeitures in the plan documents, as per IRS guidance, and did not violate any fiduciary duties by using the funds as laid out.

“The Complaint should be dismissed because it effectively seeks (i) to bar the long-standing practice, expressly required by a sixty-year-old IRS regulation, of reallocating forfeitures to cover other benefits promised by the Plan and (ii) to require instead that forfeitures be diverted to individual participant accounts to provide additional benefits not promised by the Plan,” the motion states. “The Court should reject Plaintiff’s novel, and strained, construction of ERISA.”

Lawyers for Clorox went on to argue that Congress and the Department of Labor, which has authority over the Employee Retirement Income Security Act, have endorsed this use of forfeitures.

McManus v. Clorox Co. is one of five filed by Pasadena, California-based law firm Hayes Pawlenko LLP this year regarding how plan sponsors managed funds from nonvested portions of terminated participant accounts. In addition to Clorox, those complaints target HP Inc., Intuit Inc., Qualcomm Inc. and Thermo Fisher Scientific Inc.

According to the IRS, participant forfeitures can be used to pay plan expenses, to reduce employer contributions or by allocating them back to plan participants, according to a recent presentation by attorneys from Faegre Drinker Biddle & Reath LLP. How fiduciaries handle forfeitures, however, must be laid out in the plan documents, Faegre Drinker attorneys noted.

In Clorox’s attempt to dismiss the case, its attorneys note the five other complaints being filed in a short period of time, arguing that the law firm is seeking “to undo sixty years of lawful conduct.”

In an additional filing by the Clorox defendants, they requested judicial notice of several plan documents intended to show the fiduciaries followed procedure in documenting how the plan would use participant forfeitures. The documentation included the Clorox Co. 401(k) Plan Amendment and Restatement and summary plan description, both effective January 1, 2017.

“The Court may consider a document that contains the [p]lan’s terms and benefits even though [p]laintiffs do not reference the document in the [complaint],” the court document states.

Clorox has also requested judicial notice of the plan’s Forms 5500 from 2017 to 2023, which were filed with the DOL, as well as excerpts from H.R. No. 99-841, which is a “proper subject of judicial notice because it constitutes excerpts of the legislative history for the Tax Reform Act of 1986.”

Clorox’s 401(k) plan has 6,451 active participants with about $1.87 billion in assets, according to 2022 Form 5500 filings tracked by Brightscope, which, like PLANSPONSOR, is owned by ISS STOXX.

According to the court documents, eligible Clorox employees begin receiving the plan’s nonelective employer contribution after one year of service. At the end of each calendar year, the company makes a contribution equal to 6% of the participant’s eligible compensation, with vesting of that contribution based on a set schedule according to years of service.

If a participant leaves the plan, any nonvested amount reverts to the plan. The plan document notes that the “[f]orfeited amounts will be used, as determined by the Committee in its sole discretion, to pay Plan expenses, to reduce contributions to the Plan and to restore forfeitures,” according to the court filings.

McManus initially brought six claims of negligence against the plan committee, including breaching fiduciary duties regarding the forfeitures and failing to monitor fiduciary practices. Clorox is seeking dismissal of all six claims. Its request for dismissal was filed ahead of the January 23, 2024 hearing on the case.

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