Compliance August 12, 2019

Walgreen 401(k) Participants Seek $300M in Lawsuit Over TDF Mismanagement

The complaint says the target-date funds used in the plan and as the designated default investment were underperforming from the time they were selected, resulting in a great loss to participants.

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A group of current and former participants in the Walgreen Profit-Sharing Retirement Plan, individually and as representatives of a class of participants and beneficiaries of the plan, have filed a lawsuit on behalf of the plan for breach of fiduciary duties under the Employee Retirement Income Security Act (ERISA).

The lawsuit names as defendants Walgreen Co., the Retirement Plan Committee For Walgreen Profit-Sharing Retirement Plan and its members, and the Trustees for the Walgreen Profit-Sharing Retirement Trust and its members.

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The complaint notes that as fiduciaries, the Walgreen defendants must prudently curate the plan’s investment options. They must regularly monitor plan investments and remove ones that become imprudent. The lawsuit alleges that the defendants breached these fiduciary duties by adding to the plan in 2013 a suite of poorly performing funds called the Northern Trust Focus Target Retirement Trusts and keeping these funds in the plan despite their continued underperformance.

Despite a market “teeming with better-performing alternatives,” the plaintiffs say, Walgreen selected the Northern Trust Funds, which already had a history of poor performance. According to the complaint, they had significantly underperformed their benchmark indexes and comparable target-date funds from the time Northern Trust launched the funds in 2010.

The lawsuit contends it was predictable that the Northern Trust Funds continued underperforming through the present. For nearly a decade, these investment options performed worse than 70% to 90% percent of peer funds, according to the complaint. The plaintiffs say not only does Walgreen refuse to remove the funds, it has actually added Northern Trust funds to the plan’s investment lineup, and selected the Northern Trust target-date funds as the plan’s default investment.

According to the complaint, the funds now comprise 11 of the 24 investment options in the plan and collectively hold more than $3 billion in plan assets, which represents more than 30% of the plan’s assets. “Walgreen’s imprudent decision to retain the Northern Trust Funds has had a large, tangible impact on participants’ retirement accounts. Based on an analysis of data compiled by Morningstar, Inc., Plaintiffs project the Plan lost upwards of $300 million in retirement savings since 2014 because of Walgreen’s decision to retain the Northern Trust Funds instead of removing them,” the complaint states.

It further says, “The Northern Trust Funds have also impaired the Plan’s overall performance. According to Brightscope, the average Plan participant could earn $193,925 less in retirement savings than employees in top-rated retirement plans of a similar size. The $193,925 disparity translates to an additional 10 years of work per participant.”

The plaintiffs are seeking to enforce the Walgreen defendants’ personal liability under ERISA to make good to the plan all losses resulting from each breach of fiduciary duty occurring during from January 1, 2014, to the date of judgment. In addition, they seek such other equitable or remedial relief for the plan as the court may deem appropriate.

Notably, given the impending U.S. Supreme Court decision in the case of Intel v. Sulyma regarding when “actual knowledge” actually starts for retirement plan participants for use in deciding when a case is filed beyond the statutory limits under ERISA, the Walgreen complaint says the plaintiffs did not have knowledge of all the material facts until shortly before they filed the complaint. “Further, Plaintiffs do not have actual knowledge of the specifics of the Walgreen Defendants’ decision-making processes with respect to the Plan, including the Walgreen Defendants’ processes for monitoring and removing Plan investments, because this information is solely within the possession of the Walgreen Defendants prior to discovery,” the complaint states.

Walgreen declined to comment on pending litigation.
Compliance August 12, 2019

Caesars Owes No Withdrawal Liability for One Closed Pension in Controlled Group

An appellate court affirmed a District Court’s judgement that because Caesars Entertainment continues to contribute to a multiemployer plan for engineering work at three remaining casinos, it is not liable under the bargaining out provision of the MPPAA.

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A federal appellate court has determined that Caesers Entertainment Corporation owes no withdrawal liability for ceasing to make contributions to a multiemployer pension plan for a closed casino while it continued to make contributions for others.

The 3rd U.S. Circuit Court of Appeals notes that the Multiemployer Pension Plan Amendments Act of 1980 (MPPAA) imposes liability on employers who withdraw from covered plans by ceasing contributions in whole or in part. The current case involves one type of partial withdrawal, “bargaining out,” which occurs when an employer “permanently ceases to have an obligation to contribute under one or more but fewer than all collective bargaining agreements under which the employer has been obligated to contribute … but continues to perform work… of the type for which contributions were previously required.”

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Caesars Entertainment Corporation (CEC) once operated four casinos in Atlantic City: Caesars, Bally’s, Harrah’s and Showboat. These comprised a “controlled group” under the Employee Retirement Income Security Act (ERISA), with CEC being the “single employer” of the group. CEC bargained with the International Union of Operating Engineers, Local 68, for engineering work at all four casinos.

In 2014, the Showboat casino closed, and CEC stopped contributing to the fund for engineering work there. The other three casinos under CEC’s control remain open, and CEC continues to pay the fund for their union work. Showboat’s closure reduced CEC’s total contributions to the fund by 17%—well below the MPPAA’s 70% threshold that would have automatically triggered liability for a partial withdrawal.

The fund claimed CEC was liable under the “bargaining out” provision of the MPPAA, but CEC disagreed. So the parties went to arbitration, and CEC lost. The arbitrator held CEC had triggered both clauses of the bargaining out provision. The arbitrator reasoned clause [2] applied because“[t]he type of work for which contributions were required at the closed Showboat is the same type of work currently being done at the remaining casinos.”

The U.S. District Court for the District of New Jersey, reversed the arbitrator’s decision. The Court assumed without deciding that, under clause [1], the jurisdiction of the Showboat collective bargaining agreement (CBA) included all engineering work in Atlantic City. But it held that, under clause [2], liability exists only when an employer replaces work that contributes to the pension fund with “work—of the same sort—that does not.” Such replacement hadn’t occurred because CEC’s “constituent members [aside from the shuttered Showboat] continue to contribute to the fund for all engineering work they perform throughout Atlantic City.”

The 3rd Circuit agreed with the District Court that the dispositive question is whether under the bargaining out provision of the MPPAA “work… of the type for which contributions were previously required” includes work of the type for which contributions are still required. The appellate court said the statutory text and Pension Benefit Guaranty Corporation (PBGC) guidance confirm that the answer is no.

The 3rd Circuit first noted that the bargaining out provision typically applies when there is a change in union representation or the employer negotiates out of an obligation to contribute to a plan. “Neither of those things happened here,” it wrote in its decision. However, the fund claims CEC continues to perform “work … of the type for which contributions were previously required,” because engineering work continues at Caesars, Bally’s, and Harrah’s. According to the court document, in the fund’s view, it is irrelevant that CEC still must contribute to the plan for the work performed by Union members at those three casinos. The appellate court disagreed.

“[W]ork … of the type for which contributions were previously required” means “work … of the type for which contributions are no longer required,” the court wrote, citing prior case law. In arriving at this conclusion, the appellate court gives “previously” its ordinary meaning at the time Congress enacted the relevant provision. “If Congress had meant to adopt the fund’s interpretation, it could have omitted ‘previously’ to no effect,” the decision states. “The provision would have targeted work ‘for which contributions were required.’ Because that’s not what Congress wrote, we give ‘previously’ some meaning. And that meaning tracks what we’ve learned from dictionaries and corpus linguistics.”

For these reasons, the appellate court said the best reading of “work … of the type for which contributions were previously required” excludes work of the type for which contributions are still required. “To hold otherwise would put us in conflict with our sister courts’ interpretation of identical language in another MPPAA provision,” the court wrote. For example, the court noted Section 1383(b)(2)(B)(i) imposes complete withdrawal liability on employers in the construction industry when they continue to perform “work… of the type for which contributions were previously required.” Two of its sister courts have held that the same provision imposes liability only when employers “cease making payments to the plan” for a type of work (e.g., construction) “while continuing to do [that work] in the area.”

The 3rd Circuit found additional support for its view in longstanding guidance from the PBGC. In the case, the District Court found persuasive PBGC Opinion Letter 83-20, which says that no withdrawal liability results from “merely ceasing or terminating an operation.” According to the PBGC, liability under the bargaining out pro-vision arises “only [in] situations where work of the same type is continued by the employer but for which contributions to a plan which were required are no longer required.” So an employer isn’t liable when it “closes one [facility] and shifts the work of that [facility] to other [facilities] which are covered by other [CBAs] under which contributions are made to the plan.”

The appellate court said, “That’s precisely what happened here. And we, like the District Court, find that the PBGC’s view tracks the text of the MPPAA.”

The appellate court affirmed the judgement of the District Court finding that, because CEC continues to contribute to its pension plan for engineering work at its remaining three casinos, it is not liable under the bargaining out provision of the MPPAA.

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