Court Reinstates Two Claims Against UPenn in Pension Suit

A US federal appeals court reinstated two out of seven claims in a lawsuit alleging that the University of Pennsylvania breached its fiduciary duties when managing its 403(b) pension funds for its employees.

In September 2017, a district court dismissed the lawsuit against the University of Pennsylvania, Sweda v. Univ. of Penn., which accused the Ivy League school of breach of fiduciary duty, prohibited transactions, and failure to monitor fiduciaries under the Employee Retirement Income Security Act (ERISA). The suit alleged Penn “failed to use prudent and loyal decision-making processes regarding investments and administration, overpaid certain fees by up to 600%, and failed to remove underperforming options from the retirement plan’s offerings.”

But last week, the appellate court reversed the district court’s dismissal of the breach of fiduciary duty claims for counts 3 and 5, and remanded for further proceedings. Count 3 accuses Penn of breaching its fiduciary duties with unreasonable administrative fees and count 5 is in regard to unreasonable investment management fees, unnecessary marketing and distribution (12b-1) fees, and mortality and expense risk fees, as well as performance losses.

The appellate court said that the district court erred in dismissing the two counts by “ignoring reasonable inferences” that were supported by the alleged facts.

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“While Sweda may not have directly alleged how Penn mismanaged the plan,” said the court in its ruling, “she provided substantial circumstantial evidence from which the district court could ‘reasonably infer’ that a breach had occurred.”

The plaintiffs are seeking to represent a proposed class of 20,000 current and former Penn employees who participated in Penn’s Retirement Plan since August 2010. The Plan is a defined contribution plan offering mutual funds and annuities, and the University matches employees’ contributions up to 5% of compensation.

Penn’s 403(b) plan offers mutual funds through TIAA-CREF and Vanguard Group, and annuities through TIAA-CREF. Since 2010, the plan has offered as many as 118 investment options, and as of December 2014, the plan offered 78 options: 48 Vanguard mutual funds and 30 TIAA-CREF options, including mutual funds, fixed and variable annuities, and an insurance company separate account.

The plaintiffs argue that Penn is obligated to limit the plan’s expenses to a “reasonable amount” to ensure that each fund is a prudent option for participants, and that it must make those decisions for the exclusive benefit of participants, and not for conflicted third parties.

Penn “squandered that leverage by allowing the plan’s conflicted third party service providers—TIAA-CREF and Vanguard—to dictate the plan’s investment lineup,” alleges the lawsuit, “to link their recordkeeping services to the placement of investment products in the plan, and to collect unlimited asset-based compensation from their own proprietary products.”

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Tags: Endowments, Lawsuits, Pension, Sweda, University of Pennsylvania

Jeffrey Gundlach

Bond guru Jeffrey Gundlach, wary of burgeoning government debt, criticized the Federal Reserve for backing off on its rate-raising regimen.

Federal Reserve Chairman Jerome “Powell used to be disciplined and pragmatic,” DoubleLine Capital Chief Executive Officer Gundlach told a group of investors in New York Tuesday. But now Powell is a creature of “fluidity,” he added. “So we can go on borrowing to infinity.”

Certainly, the current low-rate environment is an inducement to add more debt to the balance sheet, for both Washington and other borrowers, notably corporations.

Powell had been embarking on a campaign to hike rates, with four increases last year. But in January, amid concerns about a slowing domestic economy and sliding stock market, he relented and indicated that the tightening would be halted for now.

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“He’s not going to raise rates for five years,” Gundlach speculated. And he observed that President Donald Trump’s business career was marked by large leverage and bankruptcies of his casino companies. Trump, up for reelection next year, has been calling on Powell and the Fed to lower rates.

“Donald Trump loves debt,” Gundlach said. “So I knew we’d see expansion of the deficit” when Trump took over.

Pointing to the $1.2 trillion increase in the national debt in fiscal 2018, Gundlach noted that the US government’s borrowing amounted to 6% of the country’s gross domestic product (GDP), which last year increased by 2.9%. In other words, he said, “the debt grew more than GDP did.”

Amid the steady expansion of Treasury bonds needed to fund the government, he said that now-quiescent interest rates were sure to grow more turbulent. He suggested that investors take advantage of this higher volatility by an investment maneuver called a put-call straddle, using the iShares 20+year Treasury Bond exchanged-traded fund (ETF).

With such an option, an investor in effect is positioned on either side of the ETF’s price. The hope is that the ETF’s price rises or falls from the option’s strike price by a sum that exceeds the premium paid to buy the option. Should long-dated Treasury bonds, which underlie the ETF, move more than half a percentage point, the trade will be profitable, he said.

Gundlach takes a pessimistic view on US economic growth prospects this year. He termed the recent first-quarter GDP increase of 3.2% “fishy.”

If the economy slides in 2020, Gundlach said, “Trump will blame Powell.” The problem with that election stratagem, he said, is: “How many people even know that the Fed exists?”

Tags: Donald Trump, DoubleLine Capital, Federal Reserve, Jeffrey Gundlach, Jerome Powell