Compliance December 28, 2021

Plaintiffs Allege ERISA Breach Against Chicago Consultant

A new complaint claims that West Monroe ESOP participants who sold stock in the company did not receive fair market value from company distributions.

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Retirement plan participants invested in the West Monroe defined contribution (DC) employee stock ownership plan (ESOP) allege that plan fiduciaries improperly appraised the company at a deflated valuation that undervalued employees’ shares.

According to a complaint filed in the U.S. District Court for the District of Illinois, the plaintiffs claim that Chicago-based digital consulting firm West Monroe violated provisions of the Employee Retirement Income Security Act (ERISA) by failing to act in the interests of participants invested in the company ESOP.

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The plan invested primarily in the stock of West Monroe Partners, according to court documents. The plaintiffs allege that plan participants who cashed out company stock holdings were shortchanged by distributions from plan fiduciaries managing the plan.

As alleged in the complaint, the company was appraised by defendants in April and the value was pegged at $515.18 million as of year-end 2020, or $515.18 per share. The defendants used the April valuation to repurchase almost 28,000 shares of company stock from the plan at the alleged discounted price, according to the complaint, from the accounts of the plaintiff and class members.

“As a result, the defendants cashed the plaintiff and class members out of the plan for well below the fair value of their shares,” the complaint states. “Within weeks, the company would reveal that its stock’s true fair value was almost five times higher than the price the class receive.”

According to the suit, this led to employees who cashed out of the plan to receive well below the fair market value for their shares.  

“The defendants’ April 2021 valuation was neither careful, skillful, prudent, nor diligent, and it grossly undervalued the company stock held in the plan,” the complaint states.

After West Monroe completed the distributions and stock buybacks, the company revealed in October that it had sold 50% of the total shares to a third-party investor, MSD Partners, for a price nearly five times higher than was paid out to retirement plan participants, according to court documents. The suit says the deal valued West Monroe at approximately $2.5 billion, or $2,500 per share.  

“This new valuation did not come out of thin air,” the complaint states. “Long before the deal closed, the defendants’ preparations to sell half of the company would have alerted them that company stock was worth much more than $515.18 per share.”

Additionally, while West Monroe allegedly deflated the value of the ESOP participants’ stock, it enabled the company’s leaders to take advantage of the discount, the complaint alleges. Months before making distributions to employees, the company created an additional avenue for senior leaders to benefit by allowing them to buy additional shares of company stock at the lower valuation.

“The defendants thus allowed the company and its senior leaders to buy more stock at the same deflated price used to cash out [plan participants], just before the company announced the leap in valuation,” the complaint states. “As a result, West Monroe and its senior leaders captured exorbitant profits.”

West Monroe declined comment for this article.

Data and Research December 28, 2021

Data Shows Popularity of Cash Balance Plans

They are viewed as less risky than traditional DB plans, easier to manage, easier for employees to understand, and are more popular in certain industries than in others.

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There were 10,609 cash balance plans covering more than 10.5 million participants, with assets of $1.06 trillion in 2019, according to an analysis of Form 5500 filings in September by consulting firm October Three. The analysis looked at plans with more than 25 participants.

October Three found cash balance plans continue to grow in popularity across industries, with 19% of plans in the professional, scientific and technical services industries; 13% in construction; 12% in finance and insurance; 11% in health care and social assistance; and 11% in manufacturing. The biggest growth in number of cash balance plans in the past five years has been in the construction industry, with a 165% growth rate. This is followed by the real estate rental and leasing industry (126% growth in number of plans over the past five years) and educational services (100%).

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Cash balance plans have become more popular since the passage of the Pension Protection Act (PPA) of 2006. Experts say this is in part because they create less risk for plan sponsors and the funding is easier to manage than it is with traditional defined benefit (DB) plans.

The number of cash balance plans that remain active is much greater than the number of traditional DB plans that are active. The analysis found that 85% of cash balance plans were active in 2019, compared with 55% of traditional DB plans.

October Three notes that cash balance plans significantly remove the risk present in traditional DB plans. While cash balance plans still using a fixed rate of return can create investing issues, those that use a market return interest crediting rate are enjoying peace of mind and a virtually risk-free experience, the company notes.

“Among corporate plan sponsors, many employers simply find cash balance plans to be a better fit for their workforces than traditional defined benefit plans,” says John Lowell, an Atlanta-based actuary and partner with October Three.

He notes that arguments in favor of cash balance plans include that they are easier to communicate because they are easier for participants to understand. “Because they are often expressed as account balances, cash balance plans tend to be something that current employees feel that they can get their arms around,” Lowell says. “Having an account balance of, for example, $100,000, feels like something more real than having a monthly benefit of $1,000 many, many years in the future. And they grow annually with a contribution and some level of interest or earnings.”

In addition, Lowell says, the portability of cash balance benefits is a strong recruiting and retention feature. Participants can take their balances as a lump sum when they leave a job, rather than only being able to receive the money once they reach retirement age. “While not always the case, workers have gotten used to knowing that when they change jobs, they can take their benefit with them,” says Lowell.

“Additionally, as compared with a traditional pension in which the large majority of the value of that pension is accrued in later years of working, most cash balance plans are designed for employees to accrue benefits relatively ratably throughout their careers,” he notes.

Cash Balance Plans Particularly Popular With Smaller Employers

The October Three analysis shows cash balance plans grew more among plans with fewer than 100 participants than they did in larger plans. There were 9,342 plans with fewer than 100 participants reflected in the Form 5500 filings. This represents a growth rate of 336% over the past 10 years. For plans with fewer than 100 participants, cash balance plans make up 54% of all DB plans. There were 17,692 new cash balance plans with fewer than 100 participants established over the past five years.

There were 1,267 plans with more than 100 participants, representing a 9.4% increase over the past 10 years. Cash balance plans make up 21% of all DB plans with greater than 100 participants. There were 455 new plans with greater than 100 participants established over the last five years.

Cash balance plans have been a popular choice for smaller plan sponsors for years, as an analysis of 2016 data by Kravitz Inc. found that 92% of cash balance plans are in firms with fewer than 100 employees.

In 2019, the largest number of cash balance plans with fewer than 100 participants were in the professional, scientific and technical services industries. The largest number of plans with greater than 100 participants were in the manufacturing industry.

Eighty-nine percent of cash balance plans with fewer than 100 participants were active in 2019, compared with 65% of small traditional DB plans. Among cash balance plans with greater than 100 participants, 58% were active in 2019, compared with 38% of “large” traditional DB plans.

Lowell says that among small businesses and high-income professional services firms, cash balance plans are often designed as supercharged defined contribution (DC)-like plans. “In those cases, simply layering on an additional deferral arrangement on top of an existing one is both easier to design and to understand than is creating a plan with an entirely different design to function in much the same way,” he says.

He adds that in the corporate space, the prevalence of cash balance plans by industry seems to line up fairly well with the prevalence of traditional DB plans by industry. “In other words, those industries that are more likely to have traditional DB plans are roughly equally more likely for those DB plans to be cash balance plans,” Lowell says. “They tend to be industries where the emphasis on recruitment and retention is at a premium. They often employ highly skilled professionals who are difficult to recruit and difficult to retain. Those organizations often view that sponsoring a cash balance plan that is easy to communicate helps to make them an employer of choice.”

More data from the analysis is available here.

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