Compliance July 6, 2020

Use of Relatively New CITs Challenged in Second Lawsuit

The lawsuit also calls out the use of an investment manager’s proprietary actively managed funds and the plan sponsor’s failure to obtain cheaper share classes.

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Former employees of Astellas US LLC have sued the pharmaceutical company, its board of directors and its retirement plan administrative committee, as well as the plan’s discretionary investment manager, Aon Hewitt Investment Consulting, for breaches of fiduciary duties and for prohibited transactions under the Employee Retirement Income Security Act (ERISA).

According to the complaint, instead of acting in the exclusive best interest of participants, Aon Hewitt, now known as Aon Investments USA, acted in its own interest by causing the plan to invest in Aon’s proprietary collective investment trusts (CITs) for Aon’s benefit. The Astellas defendants are also accused of failing to use the plan’s bargaining power to negotiate reasonable fees for investment management services.

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Responding to a similar lawsuit filed in May, Aon told PLANSPONSOR, “As a matter of company policy, we don’t comment on litigation matters.” Astellas tells PLANSPONSOR, “We have just received the filing and are assessing the complaint. Astellas does not comment on pending litigation.”

From at least 2010 through August 25, 2016, Aon Hewitt (then known as Hewitt EnnisKnupp Inc.) was a fiduciary to the plan because it rendered investment advice for a fee. Effective August 26, 2016, Astellas and the administrative committee appointed Aon Hewitt as the plan’s discretionary investment manager.

According to the complaint, “Astellas and the administrative committee did not require that Aon Hewitt consider all prudent investment vehicles that were available to the plan prior to making any investment decision. In direct violation of their fundamental fiduciary obligations, Astellas and the administrative committee expressly agreed to allow Aon Hewitt to select for the plan exclusively from its proprietary Aon Hewitt collective investment trusts, and agreed that Aon Hewitt had no obligation to consider non-proprietary investment vehicles for the plan.”

Soon after Aon was appointed as discretionary investment manager, the lawsuit says, the defendants restructured the plan. The Astellas defendants “partnered with Aon Hewitt” to develop a new investment lineup for plan participants. With one exception, the defendants removed all the plan’s mutual funds and replaced them with six CITs, five of which were Aon’s proprietary CITs.

“Defendants failed to conduct an independent investigation into the merits of the Aon Hewitt collective investment trusts prior to placing them in the plan,” the complaint states. It says the funds had a limited performance history of less than three years when they were included in the plan. In addition, during that time, all the Aon Hewitt CITs underperformed the benchmarks selected by Aon Hewitt and their style-specific benchmarks. The lawsuit says the CITs also underperformed the comparable mutual funds they replaced on the plan’s investment menu.

Aon Hewitt is accused of earning substantial revenue from the investment advisory fees charged on the funds and of using the plan to increase its assets under management for the funds.

The lawsuit also takes issue with the use of actively managed Aon proprietary funds. It says these funds also did not have sufficient performance records when added to the plan and underperformed the benchmarks identified by Aon Hewitt, as well as charged higher fees. For example, the complaint says that by including the Aon Hewitt Large Cap Equity Fund in the plan, the defendants caused participants to lose more than $15.6 million of their retirement savings as measured by the difference in the investment returns between the Aon Hewitt fund and the Vanguard Growth Index Fund. The complaint adds that by not retaining the plan’s prior actively managed large cap growth option rather than using the Aon Hewitt Large Cap Equity Fund, participants lost in excess of $28.5 million of their retirement savings.

As another point, the lawsuit alleges the defendants violated their fiduciary duties by not using the plan’s size to obtain share classes with far lower costs than the share classes used in the plan. In addition, the lawsuit says when the investment lineup was restructured in 2016, the Astellas defendants represented to participants that it was “making available the lowest overall cost share class of each fund. By selecting and maintaining higher-cost share classes for certain plan investments thereafter, the Astellas defendants acted contrary to that express representation made to plan participants.”

The complaint states, “By providing plan participants the more expensive share classes of plan investment options, the Astellas defendants caused participants to lose millions of dollars of their retirement savings.”

In addition to requesting that the court order the defendants to restore all losses to the plan, the lawsuits request that they reform the plan to include only prudent investments.

Compliance July 6, 2020

Court Orders Parties to Scale Back Northrop Grumman ERISA Settlement

The parties’ proposed settlement agreement impermissibly releases claims that go beyond the scope of the allegations in the operative complaint.

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The U.S. District Court for the Central District of California has issued an order denying without prejudice a joint motion for final settlement approval filed by the parties in an Employee Retirement Income Security Act (ERISA) lawsuit known as Marshall v. Northrop Grumman.

The order explains that the court has received written objections to the proposed settlement from a handful of class members, who argue, among other things, that the settlement language is overly broad. Grievances were also aired during a hearing on the parties’ joint motion for final approval of class settlement, which took place on June 30.

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Because the order denies final approval of the class settlement—at least temporarily—the court has also ruled without prejudice against the plaintiffs’ motion for attorneys’ fees, reimbursement of expenses and incentive awards for class representatives. Case documents show the parties have already made representations that renewed motions for final approval of an amended settlement agreement and for attorneys’ fees are forthcoming. The court has set a hearing date of August 20 for these forthcoming motions.

The underlying lawsuit harks back to 2016, when a complaint emerged suggesting fiduciaries of Northrop Grumman’s retirement plan acted imprudently and disloyally in various ways. Notably, a similar suit was previously settled by the company. According to plaintiffs in the Marshall case, failures to train and supervise members of the plan committees allowed the plan to fall into the habit of paying excessive fees and of otherwise breaching the demands of fiduciary oversight and prudence. 

Under the parties’ proposed settlement agreement, Northrop Grumman agreed to pay a sum of $12,375,000 into a qualified settlement fund to clear itself and its fiduciaries of claims of wrongdoing. From that figure, class counsel sought to recover $4,125,000 in attorneys’ fees, as well as litigation expenses in an amount not to exceed $450,000. Class counsel also sought to recover an incentive award for each of the class representatives in an amount not to exceed $25,000 per class representative, which would also be paid from the gross settlement amount.

From there, the settlement agreement spelled out a more detailed plan about how money would be distributed among participants that had paid allegedly excessive fees for recordkeeping and various investment options provided in the plan.

After weighing the class members’ objections, the order concludes that the parties’ proposed settlement agreement releases claims that go beyond the scope of the allegations in the operative complaint. As such, the court concludes that the parties’ proposed settlement agreement contains an overly broad release of liability.

“The factual allegations underlying plaintiffs’ claims concern defendants’ management and administration of the savings plan,” the order states. “In particular, plaintiffs allege in their operative complaint that defendants distributed the saving plan’s assets to defendant Northrop Grumman Corporation as payment for services it provided to the savings plan; paid unreasonable recordkeeping fees to the saving plan’s recordkeeper; and used an active management strategy for the savings plan’s emerging markets equity fund, and failed to consider whether to convert the emerging markets equity fund to passive management. … Despite the limited factual predicate upon which plaintiffs bring suit, the parties’ proposed settlement agreement purports to preclude ‘any cause of action, demand or claim on the basis of, connected with or arising out of any of the released claims.’”

The order concludes that, by thus releasing “any cause of action, demand or claim on the basis of, connected with or arising out of any of the released claims,” the parties’ proposed settlement agreement “could capture claims that go beyond the scope of the allegations in the operative complaint, which the Ninth Circuit has held is inappropriate.”

“The overly broad scope of this release is underscored by the expansive interpretations that courts give to phrases such as ‘connected with’ or ‘arising out of,’” the order notes. “Because the scope of the proposed settlement agreement’s release of liability could extend to any cause of action that has a logical or causal connection to the released claims, and is not limited to claims based on an identical factual predicate, the proposed release of liability is impermissible.”

The full text of the order is here.

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