Faulting the fiduciary

Risk & Insurance, March 3, 2003 by Len Strazewski

Are your pension assets safe? Are your pension plan sponsors and trustees safe?

Neither may be secure, as the stock market continues to flounder and plan participants struggle to secure their future benefits. And according to a recently upheld decision of the U.S. District Court for the District of New Jersey, pension plan trustees have new, higher levels of fiduciary liability for plan performance.

In January, the U.S. Court of Appeals for the Third Circuit dismissed the last appeal of the trustees for the International Union of Operating Engineers Local 825 pension plan, who were seeking relief from a portion of an $8 million settlement of an Employee Retirement Income Security Act fiduciary liability lawsuit brought by a retiree.

The original lawsuit, Olsen v Hegarty, et at, was filed in 1997 by Harold Olsen, a heavy equipment operator and a union plan participant for more than 40 years who retired in 1987. The retiree charged that while the $400 million multiemployer defined-benefit plan had achieved regular annual returns of about 7.5 percent, with fixed income investments adequate to pay benefits, it had under-performed during the peak levels of equity market growth.

The plaintiff charged that plan assets would have been substantially larger had they been more prudently invested and diversified, and that such prudence was required under standards established by ERISA. An expert witness testified that more diversified plans averaged nearly double the returns of the union fund.

In November 2002, the district court upheld the trustees' motion for summary judgment, leading to a settlement which included $2.5 million in legal fees and costs. The appeal, filed later in the year, sought to reduce the attorneys' contingency of the settlement.

Louis R. Moffa, attorney for the plaintiff and managing partner of Schnader Harrison Segal and Lewis in Cherry Hill, N.J., says the case supports the idea that "prudent investment" for pension plans is not just measured by the plan's ability to pay out promised benefits, but by more competitive standards.

"Although the fund delivered the plan's defined benefit, the court has now spoken [saying] that ERISA requires more than minimum effort in such a pension plan," he says.

The trustees of this fund managed a significant portfolio, failed to diversify the funds, lacked investment credentials, failed to seek the advice of professional money managers and did not investigate whether different asset classes--namely stocks--in the portfolio would have improved the fund's rate of return.

"All of these aspects amount to a violation of ERISA at the fund's expense," he says.

The decision opens up the prospect of more lawsuits in two ways.

First, the district court set no formula to measure pension asset performance, but affirmed the idea that asset performance can be compared to some optimal performance level based on a mixed group of investments--which would be open to expert interpretation. As the equity markets continue to decline, even more diversified retirement plan assets may be judged harshly.

Second, by upholding the contingency fees, the court created a potentially lucrative opportunity for plaintiffs' attorneys in future ERISA litigation.

Meanwhile, the proposed regulations governing age discrimination in hybrid pension plans, announced late last year by the Internal Revenue Service and the Department of Treasury, may be more complicated than originally thought, say some pension experts.

The rules resolved age-discrimination standards for new cash-balance plans by placing the defined-benefit/defined-contribution hybrid plans under the standards for defined-contribution plans. However, Eric Lofgren, director of global benefits consulting for Watson Wyatt Worldwide in Bethesda, Md., says the rules may not be as helpful as they first appeared.

"The proposed regulations are well-intentioned and offer some positive news for plan sponsors, including a rejection of the charge that cash-balance plans inherently violate age discrimination," he says.

"But the rules would disallow some plans, such as pension-equity plans, that can be more favorable to older workers."

Len Strazewski can be reached via e-mail at lenstrazewski@compuserve.com.