Settlement Agreement May Conclude Allianz Self-Dealing Challenge

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.

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.