Compliance July 18, 2023

Verizon Reaches $30M Settlement in 401(k) Complaint

The 2016 lawsuit accused Verizon of failing to monitor a hedge fund in its retirement plan TDFs.

Reported by

Verizon Communications Inc. has agreed to pay $30 million to settle a complaint from 2016 related to allegations of an underperforming hedge fund in its retirement plan target-date funds, according to a July 7 filing in the U.S. District Court for the Southern District of New York.

Class representative Melina Jacobs and Verizon agreed to the proposed settlement, pending court approval, over allegations of Verizon and its employee benefits committee failing to uphold its fiduciary duty in monitoring the performance of a hedge fund called the Global Opportunity Fund and not taking “corrective action regarding the Fund despite obvious and long-term underperformance.”

In the case, Jacobs et al. v. Verizon Communications Inc. et al., Verizon’s attorneys had argued that the company had been following its fiduciary duty in monitoring the target-date funds managed by investment firms Russell Investments and J.P. Morgan. Other allegations regarding underperforming target-date funds and a lack of disclosures related to participant fee statements were dismissed in multiple rulings. Fidelity was also removed as a defendant in the lawsuit because it had not been a plan fiduciary.

But U.S. District Judge Paul G. Gardephe had allowed the Global Opportunity Fund argument to continue, with a trial set to begin this month, according to the court filing. Instead, after two days of negotiations, the parties came to an agreement on the $30 million payment. One-third of the settlement will go to the law firms representing the class, with the remainder going to plan participants as tax-deferred contributions to their accounts or rollovers into individual retirement plan accounts.

Get more!  Sign up for PLANSPONSOR newsletters.

The plaintiffs were represented by law firms Glancy Prongay & Murray LLP, Schneider Wallace Cottrell Konecky LLP and Edgar Law Firm LLC. There are about 160,000 members in the class, according to the court filing.

Verizon did not immediately respond to a request for comment on the proposed settlement.

The plaintiffs’ attorneys wrote that, based on comparing the Global Opportunity Fund to an equity investment benchmark, the damages for the period between April 30, 2010, and January 31, 2017, would be between $102.6 and $231 million. They went on to say that the settlement amount, representing about 13% to 29.2% of those damages, “is appropriate, given the wide range of potential damage outcomes at trial—as well as the possibility of a verdict in favor of Defendant that would result in zero recovery for the Class.”

The Global Opportunity Fund, which had been included in part of the portfolio for target-date funds in the plan, used a strategy aiming to “add value, relative to its benchmark, by investing in the most attractive markets on a global basis, while simultaneously underweighting, or shorting, markets that are viewed by the fund managers as overvalued.”

The fund allegedly had a target rate of return of 12%, which “was subsequently lowered at least twice,” according to the filing. The plaintiff alleged that between 2007 and 2016, the fund “severely underperformed,” as its annualized net performance ranged from -10.32% to 13.88%, with negative returns in three years, ending with an earned aggregate of 1.4% at the end of 2016.

Compliance July 18, 2023

Ownership Structure, Investment Strategies of Annuities Concern Sponsors, ERISA Council Says

The ERISA Advisory Council discussed emerging trends in the annuities market, as well as concerns expressed by sponsors and other shareholders.

Reported by

Jeff Turner, EBSA’s deputy director of the Office of Regulations and Interpretations, summarized many of the trends in the pension risk transfer market and commonly expressed concerns from pension fiduciaries and stakeholders at a hearing the council hosted Tuesday at the Department of Labor.

The hearing was held to discuss possible changes to Interpretative Bulletin 95-1, which requires that pension fiduciaries select the safest annuity providers when executing pension risk transfers. Considering modifications to IB 95-1 was required by Section 321 of the SECURE 2.0 Act of 2022, enacted in December 2022.

Get more!  Sign up for PLANSPONSOR newsletters.

Turner explained that PRT annuity purchases have been trending up and hit a record in 2022, reaching 568 purchases totaling approximately $52 billion in assets. Higher PBGC premium rates, higher inflation, market volatility and concerns about plan funding are driving this trend, he stated. Higher discount rates, which reduce the attractiveness of making lump sum payments to pensioners, also contributed.

With such a significant increase, many pension fiduciaries, pension advocates and other stakeholders expressed concerns about the growth and evolution of the market.

Turner introduced the session by presenting two letters sent by Senator Sherrod Brown, D-Ohio, to the Department of the Treasury about PRT developments. Specifically, Brown highlighted “the growth of offshore reinsurance markets and increased risk-taking behavior across the life insurance industry, which could contribute to increased systemic risk across the financial system.”

Both reinsurance and risky investment strategies had been identified as common concerns among fiduciaries, according to Turner. He added as concerns the annuity provider’s ownership structure; its administrative experience and track record; and the insurer’s Risk-Based Capital, a ratio calculated by dividing capital by risk-weighted assets.

Turner identified private credit, asset-backed securities, subordinated debt, real estate and private equity as riskier non-traditional assets that are becoming more popular as investments held by annuity providers in their general accounts. Turner said there had been a “shift away from bonds” in insurers’ portfolios of about 4% between 2015 and 2022.

Addressing ownership structure, Turner noted that an annuity provider’s affiliates, parent company and other business relationships were all common concerns held by stakeholders. Affiliates can create conflicts of interest that result in investors being prioritized ahead of annuity holders, he said. Some stakeholders speaking at the hearing argued that an updated IB 95-1 should be required to include an analysis of an annuity provider’s parent company.

that any change to IB 95-1 should require the inclusion of insurers’ RBC ratios as part of fiduciaries’ analysis, according to Turner. He noted that some disagreed with that suggestion because, as state-regulated entities, the annuity providers are subject to different regulatory regimes, and many states do not permit insurers to advertise their RBC. Requiring its analysis on an updated IB 95-1 could effectively force those insurers to violate state laws.

Lastly, Turner said stakeholders have expressed concern about the administrative experience of life insurance providers, who might not have adequate staff to properly and safely administer more. Related administrative concerns such as cybersecurity, other information technology, periodic system reviews and even response times of call centers were all identified as key administrative items when considering a PRT provider, Turner said at the hearing

The council meets again tomorrow and will produce recommendations on possible changes to IB 95-1 to be provided to the DOL, which must report its findings to Congress by the end of the year.

 

«