Compliance January 26, 2022

TDF Suite Questioned in ERISA Lawsuit Against Fluor Corp.

The suit also alleges plan fiduciaries allowed for excessive recordkeeping fees to be charged to participants.

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Former employees at the Fluor Corp. have filed a class action lawsuit against the engineering company, its board of directors and its retirement plan committee alleging Employee Retirement Income Security Act (ERISA) breaches of fiduciary duty.

The plaintiffs claim that the defendants failed to fully disclose the expenses and risk of the plan’s investment options to participants; allowed unreasonable expenses to be charged to participants; and selected and retained high-cost and poorly-performing investments when more prudent investments were readily available.

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The lawsuit says a plan of Fluor’s size should have been able to obtain reasonable rates for recordkeeping and administrative (RK&A) services that were significantly lower than the per-participant rates charged. According to the complaint the plan had 15,062 participants with account balances and assets totaling approximately $3.45 billion, placing it in the top .1% of all defined contribution plans by plan size, as of year-end 2020.

“According to publicly available data and information from the Form 5500 filings of similarly sized defined contribution plans during the class period, other comparable plans were paying much lower fees than the plan throughout the class period,” the complaint states. “That is clear and compelling evidence that the reasonable market rate is lower than what the plan was paying since these comparable plans were able to negotiate lower fees for materially identical services.”

The lawsuit calls into question the plan’s use of what it calls “custom” target-date funds (TDFs), which the plan uses as its qualified default investment alternative (QDIA). According to the complaint, the TDFs are managed by BlackRock and mirror the BlackRock LifePath Index Funds, a collective investment trust (CIT) TDF suite.

“Throughout the class period, there were many TDF offerings that consistently and dramatically outperformed the Fluor TDFs, providing investors with substantially more capital appreciation,” the complaint states. “It is apparent, given the continued presence of the Fluor TDFs in the plan’s investment menu, that the defendants failed to scrutinize the performance of the Fluor TDFs against any of the more appropriate alternatives in the TDF marketplace. Accordingly, the plan’s investment in the Fluor TDFs has resulted in participants missing out on millions of dollars in retirement savings growth.”

The lawsuit claims other funds selected for and maintained in the plan were imprudent. It also alleges that plan participants were not warned of the risk of investing in actively managed funds.

Fluor Corporation did not respond to a request for comment about the lawsuit.

Fluor joins a growing list of plan sponsors that have been targeted in excessive fee lawsuits.

Attorneys say plan sponsors can mitigate the implications of or avoid ERISA litigation by including defensive provisions in their plan documents.

Data and Research January 25, 2022

OregonSaves Program Is Helping Boost Employees’ Retirement Savings

Academic research analyzed the auto-enrollment IRA program for private sector workers. 

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The OregonSaves state-run automatic-enrollment individual retirement account (IRA) program has generated savings for a substantial number of participants and meaningfully increased employee retirement savings, according to a research paper from the University of Michigan’s Retirement and Disability Research Center.

The research, titled “Auto-Enrollment Retirement Plans in OregonSaves,” examines the state-sponsored IRA program by analyzing participation rates, account balances and inflow/outflow data using administrative records between August 2018 and April 2020. The paper was written by John Chalmers, with the University of Oregon; Olivia S. Mitchell, of the University of Pennsylvania; Jonathan Reuter, with Boston College; and Mingli Zhong, at the Urban Institute.

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“OregonSaves is generating savings for a substantial number of employees: In fact, more than 67,700 employees accumulated over $51 million through April 2020 (and $79.1 million through November 2020),” the paper states. “We find that the program serves employees across a range of industries, but primarily those with low wages and high turnover.”

Researchers peg OregonSaves participation rates—based on those with a positive account balance—in a range between 62.4% on the higher end and 34.3% on the lower end. The range is used because of high turnover among enrolled employees.   

“Consistent with these job traits, OregonSaves participation rates under automatic enrollment are significantly lower than in other settings,” the paper states. “[It’s] likely reflecting our finding that employers targeted by OregonSaves are disproportionately in industries paying lower and more volatile wages and having higher levels of job turnover.”

State-run IRA programs aim to increase retirement savings for workers who lack access to an employer-sponsored retirement plan and self-employed individuals, which accounts for about half of the U.S. private workforce, according to the paper. Several states, including Oregon, have mandated that private-sector firms offer retirement saving accounts to their employees.

“OregonSaves’ explicit goal is to boost workers’ personal retirement savings, thereby decreasing dependency on Social Security and means-tested social transfers,” the paper states.

The average participating employee in the sample studied earns $2,365 per month, has a within-person standard deviation of monthly earnings of $945, and an annual job turnover rate of 38.2%.

“Overall, we conclude that OregonSaves has meaningfully increased employee savings,” the paper states. 

Although the state-run OregonSaves program has achieved some successes, researchers explain that such auto-enrollment programs can have finite limits.

“We have also identified limits to what automatic enrollment savings plans can achieve when expanded to workers in industries and firms with low wages, volatile wages and high turnover rates,” the paper states.  

Previous research on state-run IRA programs analyzed the California program, CalSavers. The CalSavers’ Retirement Savings Board’s “2021 Year in Review Report” indicates that the state-run retirement program in California is seeing a steady 70% participation rate among eligible employees and that 95% of savers accepted an automatic contribution increase.

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