Compliance February 1, 2017

Trust, Asset Purchaser Not Liable for Termination Liabilities of Single-Employer Plan

A federal court rejected the PBGC’s attempts to recoup termination liabilities from a personal trust and an asset purchaser of the sponsoring plan.
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A federal court judge has concluded that the Pension Benefit Guaranty Corporation (PBGC) cannot recoup termination liabilities for a single-employer plan from a personal trust of the owner or the asset purchasers of the sponsoring company.

Findlay Industries, Inc. established a pension plan in June 1964. Findlay remained the sponsor and administrator of the plan from its inception until its termination effective July 2009. The PBGC claims several defendants are jointly and severally liable for the termination liabilities incurred by Findlay.

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Philip D. Gardner founded and owned Findlay until his death. In January 1987, he established Trust 1987 and donated two parcels of property to the trust. The trustee was directed to “hold, manage and control the property comprising the Trust estate, collect the income therefrom, and . . . disburse the net income and distribute the corpus thereof” to provide for the “care, support, maintenance, and welfare” of Gardner’s sisters. Later, the funds were also to be used for the sisters’ funeral expenses as the trustee saw fit. After the passing of the last sister, the balance of the trust was to be split between Gardner’s two sons.

According to the opinion of Judge Jack Zouhary of the U.S. District Court for the Northern District of Ohio, the PBGC alleges Trust 1987 was “leasing a parcel of real property to [Findlay] from no later than July 1, 1993, through at least November 2009.” (Doc. 3 at ¶ 64). The agency alleges this lease “had a substantial economic nexus with [Findlay], such that including [Trust 1987] in [Findlay]’s controlled group would further the purpose of the controlled group rules, preventing employers from limiting their responsibilities by fractionalizing into separate entities.”

However, citing the case Commissioner v. Groetzinger, in which the Supreme Court held that to constitute a trade or business for tax purposes, a person must engage in an activity for the primary purpose of income or profit, and with continuity and regularity, Zouhary agreed with Trust 1987’s argument the the PBGC failed to plead facts necessary to establish the trust was a trade or business, and thus, Trust 1987 cannot be held liable for termination liabilities under the Employee Retirement Income Security Act (ERISA).

NEXT: Asset purchaser’s liability

According to the opinion, in December 2012, PBGC and Findlay agreed to terminate the plan effective July 2009. In May 2009, F I Asset Acquisition LLC (FIAA) purchased Findlay’s equipment, inventory, and receivables associated with the Springfield and Molded Products plants. FIAA then transferred these purchases to Michael Gardner and his wholly-owned corporation Milstein, Jaffe & Goldman Inc., which in turn transferred the assets to September Ends and Back in Black. September Ends now operates the Springfield plant, and Back in Black operates the Molded Products plant.

The PBGC advances a claim of successor liability under federal common law against September Ends and Back in Black, alleging both are subject to the termination liabilities because: (1) they had notice of Findlay’s termination liabilities; (2) Findlay was unable to pay the termination liabilities; and (3) there was “substantial continuity of operations” between Findlay and these two companies. September Ends and Back in Black argue that as asset purchasers they do not fall within the limited types of companies for which ERISA provides successor liability. Under the relevant ERISA statutes, those who may be liable include the contributing sponsor, the plan administrator, and members of the contributing sponsor’s controlled group. September Ends and Back in Black fit none of these categories.

With no statutory support, the PBGC asked the court to apply a federal common law doctrine of successor liability to the case, citing Upholsterers’ Int’l Union Pension Fund v. Artistic Furniture of Pontiac, and other cases. According to the opinion, the PBGC describes in great detail the similarities between withdrawal liability for multiemployer plans and termination liability for single-employer plans, arguing these similarities justify extending the federal common law doctrine from the first context to the second.

However, Zouhary noted that ERISA is neither silent nor ambiguous in terms of who may be pursued for termination liabilities. The statutory provisions at issue clearly identify who may be pursued for monetary recovery: namely, the plan administrator, the contributing sponsor along with members of the sponsor’s controlled group, as well as successor corporations which are essentially alter egos of their original corporations. “Nowhere in these provisions did Congress suggest, let alone endorse, successor liability for asset purchasers, leading this Court to conclude that Congress did not intend such entities to be included,” Zouhary wrote.

He added that, “As Congress has established several categories of persons and entities which may be pursued for contributions to underfunded single-employer pension plans, [PBGC] has avenues of redress to protect the pensions of vested employees. Adding more targets is not necessary to fulfill ERISA’s policy of protecting plan participants.”
Investing February 1, 2017

Plan Sponsors Must Carefully Look 'Under the Hood' of TDFs

With different underlying allocations and fee structures, it is up to plan sponsors and their supporting advisers and consultants to select the proper TDF approach for their participants’ unique preferences and needs.
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A new issue brief from the Center for Retirement Research (CRR) at Boston College takes a “look under the hood” of the target-date fund (TDF) market, finding in broad terms that TDFs remain one of the most sensible investing approaches for plan sponsors to offer to their participants.  

The benefits of TDFs are well-known, CRR researchers argue. The funds help otherwise novice individual investors to access specialized assets in a way that rationally complements conventional stocks and bonds, and, for this benefit, TDF fees are only modestly higher than if an investor assembled a similar portfolio on his own. Beyond this, CRR finds that TDF investment returns are “broadly in line with other mutual funds” net of fees.

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However, the analysis contends that plan sponsors absolutely must pick their managers carefully and make a real effort to control costs—and they must make sure their overall investing convictions match those of the manager. TDF manager decisions on market timing and fund additions do not always end up helping performance or matching the preferred investing style of a given investor in their fund, CRR observes.

“At the broadest level, each TDF has a glide path that specifies the percentage in equities and bonds over time,” the research lays out. “The bulk of the sample funds with a target date of 2035 held 70% to 85% in equities in 2011. But a quarter of the funds held equity shares either above or below this range … Interestingly, looking under the hood shows that most TDFs are not the simple mix of equities and bonds that many envision.”

CRR finds that the “typical TDF” invests in 17 funds on average. “These holdings include emerging markets, real estate and commodities,” the analysis says. “And the prevalence of these specialized assets has increased over time.”

Findings about fees in the research are particularly telling. As CRR explains, TDFs generally have two layers of fees, which include the fees charged by the underlying mutual funds and the fees added on by the TDF for the cost of managing the fund. The former are generally termed “underlying fees” and the latter, “overlay fees.”

“Like other mutual funds, TDFs often have several share classes of the same fund,” CRR finds. “Fund managers use share classes to offer different fees and services to different investors. For example, Class A shares have an upfront load fee for investments—a commission charge—while Class C shares have a level load each year. No-load shares have no commission charge but may have other fees to cover specific investment services … In addition, funds often offer special low-fee share classes only to larger investors, giving them a volume discount.”

NEXT: The fee story gets complicated 

All of these options can work, but it is up to plan sponsors and their supporting advisers and consultants to select the proper approach for their participants’ unique preferences and needs.

CRR admits the “fee story for TDFs gets a little complicated.”

“As expected, the amount of the overlay fee added by each TDF differs by share class, but the fees charged by the underlying funds are actually the same because the underlying funds all invest in the same share classes,” CRR says. “For example, despite their different names, a Class A TDF and a Class C TDF both invest in the same class of underlying mutual funds.”

The research notes that some investors, hearing this, may prefer attempting to replicate a TDF portfolio by picking all their own mutual funds.

“Interestingly, the analysis found little benefit from this do-it-yourself approach,” CRR warns. “The reason is that individual investors who buy, say, Class A shares will pay more than the TDF itself pays for Class A shares, as the TDF has access to a lower-cost version of the shares due to its size.” Besides this, it will be difficult for an individual investor to match the consistency and professionalism of a professional TDF management team—a factor that comes into play when regular rebalancing is required. 

The CRR analysis goes on to suggest that investors may want to shy away from TDFs that promise to be overly tactical, despite the appeal of attempting to offer greater protections on the downside. “As noted, all TDFs have a glide path that determines how their stock-bond allocation changes over time,” the researchers say. “However, funds often deviate from their path to try to improve returns by responding to changing market conditions. The results show that, compared with strictly following the glide path, the average return due to market timing across all funds is -11.5 basis points [bps] per year … If the returns are weighted toward funds with a longer track record, the result is -14.1 basis points. In short, deviations from the glide path do not improve, and may even hurt, performance.”

The full issue brief, “Target Date Funds: What’s Under The Hood?,” is available for download here. 

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