Compliance December 29, 2017

Settlement Agreement May Conclude Allianz Self-Dealing Challenge

Along with non-monetary relief, Allianz will pay $12 million into a common fund for the benefit of class members, to be allocated pro rata among the members in proportion to their account balances in the plan during the relevant period.

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According to the text of a settlement motion filed in the U.S. District Court for the Central District of California, Allianz Asset Management has agreed to settle a sizable Employee Retirement Income Security Act (ERISA) fiduciary breach lawsuit dating back to 2015.

Two participants in an Allianz retirement plan initially filed the claims, suggesting the company and its asset management partners, including PIMCO, misused employees’ 401(k) plan assets for their own financial benefit. To industry observers, the lawsuit represented one of the first examples of now-common self-dealing fiduciary breach claims, and so readers will likely be interested to learn the details of the settlement.

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Broadly speaking, under the terms of the proposed settlement, Allianz will pay $12 million into a common fund for the benefit of class members, which will be allocated pro rata among the members in proportion to their account balances in the plan during the relevant period. The monetary relief is significant, the settling parties state, and compares favorably to settlements in other cases of this type. Notably, this sum will be distributed to participants “after deduction of any attorneys’ fees, expenses, and class representative awards approved by the court.”

Among the non-monetary relief agreed upon, for a period of no less than three years from the settlement agreement’s effective date, Allianz must retain an “unaffiliated investment consultant” to provide an annual evaluation of the plan’s investment lineup and review the plan’s investment policy statement (IPS), among other prospective relief.

The settlement motion details the process of discovery, debate and eventual negotiation engaged in by fiduciaries and plaintiffs as follows: “During the course of the litigation, the settling parties engaged in substantial discovery. This included production of over 160,000 pages of documents by defendants; production of additional documents by the class representatives; production of documents by non-parties; seven depositions of defense fact witnesses; depositions of each of the named plaintiffs; and one third-party fact witness deposition. In addition, the settling parties also exchanged reports from their respective experts, including three reports from plaintiffs’ experts (Ian Ayres, Ph.D., Steve Pomerantz, Ph.D., and Marcia Wagner, Esq.) and four reports from defendants’ experts (Randolph Bucklin, Ph.D., Russell Wermers, Ph.D., Raymond Kanner, and Kristen Willard, Ph.D.). All seven experts were deposed by counsel for the settling parties.”

As this process played out, on June 15, 2017, following a hearing on the motion, the court granted plaintiffs’ motion for class certification, conditionally certifying two classes, one class seeking monetary relief, and a subclass seeking injunctive relief. Allianz in turn petitioned the Ninth Circuit for interlocutory review of the order certifying a class, which the Ninth Circuit denied on September 13, 2017.

After this defeat, Allianz moved for summary judgment on August 25, 2017 on all claims. That motion was fully briefed by October 6, 2017. A hearing on Allianz’s motion was scheduled for October 27, 2017. However, the parties reached a settlement-in-principle on October 24, 2017, and the court subsequently vacated all pending case deadlines in this lawsuit.

Details from the settlement decision

Helping to define the ultimate amount of the settlement, one of the plaintiffs’ experts calculated total plan-wide losses suffered from self-dealing and fiduciary disloyalty (including losses due to both allegedly excessive fees and investment underperformance) under four different models: two models based on comparisons to Vanguard index funds and two models based on comparisons to popular funds among large 401(k) plans. As the text of the settlement agreement lays out, for three of those four models, the estimated losses fell within a relatively narrow range of between $39.5 million and 47.0 million, with the fourth model generating a higher estimate of $65.3 million.

The expert witness called by the plaintiffs also attempted to break out the losses due to excessive fees based on various scenarios, including comparisons to other plans—based on data from the Investment Company Institute—and comparisons to other popular funds and Vanguard index funds. Under most of these scenarios, the estimated “excess fee” damages also fell within a relatively narrow range of between $15.2 million and $24.1 million (with the index funds comparison generating a higher excess fee estimate of $41.0 million). Thus, the negotiated $12 million recovery represents just 20% to 25% of the total estimated losses under the majority of the models, and a higher percentage if one were to look only at that portion of the analyses that focus on fees.

If this seems low on first review, the settling parties point out that since 1995, class action settlements have typically only recovered between 5.5% and 6.2% of the class members’ estimated losses. Beyond the fact that plaintiffs faced significant expense and risk in continuing the litigation, the settlement also provides substantial prospective relief that is non-monetary in nature but still highly valuable for resolving plaintiffs’ original concerns. As explained above, Allianz will retain an independent investment consultant to review the plan lineup and the plan’s investment policy statement on an annual basis for a period of no less than three years. As an added benefit, any revenue sharing amounts received by the plan’s recordkeeper on investments held by plan participants will be rebated to participants’ accounts.

Finally, the plan’s investment committee meeting minutes will henceforth include a description of the fiduciaries’ rationale for the inclusion of any new qualified default investment alternative (QDIA) placed in the plan’s investment lineup.

The settlement motion is available here; the full settlement agreement text is available here.

Compliance December 28, 2017

Princeton University Lawsuit Stayed While 3rd Circuit Deliberates

On the motion for reconsideration of its previous choice to rule against summary dismissal, the court is quite skeptical. It has agreed, on the other hand, to stay the proceedings ahead of a 3rd U.S. Circuit Court of Appeals decision.

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Among the final decisions handed down in 2017 by the U.S. District Court for the District of New Jersey was a complicated ruling on the Employee Retirement Income Security Act (ERISA) lawsuit filed against the retirement plans of Princeton University.

The initial lawsuit charged the university with failing to leverage its retirement plans’ collective and massive bargaining power to benefit participants and beneficiaries. Defendants were also accused of inappropriately contracting with two recordkeepers instead of one; and with failing to investigate, examine and understand the real cost to participants for administrative services, thereby causing the plans to pay unreasonable and excessive fees for recordkeeping and investments.

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Plaintiffs suggested Princeton inappropriately agreed to pay an asset-based fee for administrative services that increased as the value of his participant account rose, even though no additional services were being provided. Further, the suit contended, Princeton “selected and retained investment options for the plans that historically and consistently underperformed their benchmarks and charged excessive investment management fees, as well as share classes that were more expensive than other share classes readily available to qualified retirement plans that provided plan investors with the identical investment at a lower cost.”

Since the initial lawsuit was filed, both the plaintiffs and defendants have raised and countered numerous cross motions and procedural challenges. Next in the timeline, on August 7, 2017, Princeton filed a motion to dismiss and for summary judgment against the would-be class of plaintiffs. On September 19, the court granted in part and denied in part Princeton’s various motions.

The court explained its decision in an amended opinion filed on September 25, 2017. The amended opinion dismissed the first two counts of the plaintiffs’ complaint with respect to the duty of loyalty and also dismissed the third count of the plaintiffs’ complaint in its entirety, granting plaintiffs leave to amend on all counts. At that juncture, the court further denied Princeton’s alternative motion for summary dismissal on statute of limitations grounds.

Moving ahead in the timeline, with court approval, the parties agreed to a revised briefing schedule for Princeton to file a motion for reconsideration and for plaintiffs to file an amended complaint. On October 31, 2017, Princeton filed its motion for reconsideration and simultaneously filed a motion to stay, in view of the docketed appeal to the 3rd U.S. Circuit Court of Appeals in the similar but unrelated matter of Sweda v. University of Pennsylvania. In response, the plaintiffs opposed both motions, leading to the current decision. 

What does it all mean?

On the motion for reconsideration of its previous choice to rule against summary dismissal, the court is quite skeptical: “Reconsideration is not an opportunity to raise new matters or arguments that could have been raised before the original decision was made. See Bowers v. NCAA. Nor is a motion for reconsideration an opportunity to ask the court to rethink what it has already thought through. See Oritani Sav. & Loan Ass ‘n v. Fidelity & Deposit Co. of Md. Rather, a motion for reconsideration may be granted only if there is a dispositive factual or legal matter that was presented but not considered that would have reasonably resulted in a different conclusion by the court. Mere disagreement with a court’s decision should be raised through the appellate process and is inappropriate on a motion for reconsideration.”

However the discussion of the successful motion to stay is far more nuanced and sets out important details in terms of the way the district court views its obligation to follow and potentially respond to similar cases in different districts within its appellate circuit.

The decision explains as follows: “Defendant has brought to the court’s attention an appeal pending before the Third Circuit Court of Appeals in Sweda v. University of Pennsylvania. In that case, a plaintiff brought a putative class action claiming fiduciary breaches of ERISA by the University of Pennsylvania, on the basis of substantially overlapping factual allegations as those alleged by plaintiff here. Two days after this court granted in part and denied in part defendant’s motion to dismiss, Judge Gene Pratter of the Eastern District of Pennsylvania granted the University of Pennsylvania’s motion to dismiss on all claims, finding that Sweda’s complaint failed to create a plausible inference of fiduciary breach sufficient to survive a motion to dismiss. Sweda appealed.”

With this process unfolding in the background, Princeton sought a stay of its own case until that appeal is decided, asserting that the ERISA claims against each university defendant are “strikingly similar and disposition of the appeal will clarify the controlling law, conserve judicial resources, and be highly instructive in this action going forward.”

Naturally, the plaintiffs asserted that Princeton is “engaging in litigation gamesmanship and delaying tactics.” Of all the cases brought to the court’s attention, however, the only other case decided in the 3rd Circuit and governed by the law of this circuit is Sweda, and the appeal of that case alone directly bears on the prior and future rulings of this court.

With this ruling, the New Jersey district court agrees that a stay would simplify issues and promote judicial economy to some extent: “While plaintiff disputes defendant’s characterization of the overlaps between Sweda and the instant action, it is undoubtedly true that a Third Circuit ruling on the viability of claims raised in both lawsuits will create a more definite roadmap for this court in applying controlling law. Should the Third Circuit affirm the Sweda decision, which dismissed the complaint in its entirety for failing to state a plausible claim to relief, this court would need to revisit its earlier opinion allowing certain of plaintiffs’ claims to proceed under the same standard. The court finds that a stay would promote judicial economy by preventing needless back-and-forth in discovery or motion practice on disputed legal standards in the Third Circuit’s law on fiduciary breaches under ERISA, streamlining discovery and guiding future proceedings. This weighs heavily in favor of granting a stay.”

The full text of the Princeton decision includes additional considerations weighing ultimately in favor of granting the stay.

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