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Plaintiffs in Class Action ERISA Lawsuit Allege Breach of Fiduciary Duties

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Plaintiffs in a proposed class action ERISA retirement fund lawsuit claim that not only were the funds mismanaged, but that an inherent flaw prevented the Plan from achieving stated objectives.

Denver, COAn ERISA lawsuit was filed at the end of November in Colorado alleging mismanagement of a stock fund that resulted in losses for the defined contribution plan participants.

According to Court documents, the benefit plan lawsuit was filed November 30 in US District Court for the District of Colorado. The defendant in the class action is CenturyLink Inc., among others.

CenturyLink, according to Court documents, appointed a subsidiary as its retirement plan investment fiduciary in 2011. That subsidiary is identified as CenturyLink Investment Management (CIM). The next year, in 2012 CIM undertook the formation of CenturyLink, Inc. Defined Contribution Plan Master Trust. In order to populate the new entity, assets of CenturyLink’s two 401(k) retirement plans were merged into the Master Trust.

Plaintiffs claim that CenturyLink then re-established the investment options for the plan, which is reported to have included a number of custom funds designed by CIM.

Plaintiffs allege underperforming retirement plan was mismanaged

PlanSponsor (12/06/17), a newsletter serving the investment industry, noted in its reporting of the class action pension plan lawsuit that the entity at issue is the CenturyLink Dollars & Sense 401(k) Plan and the Active Large Cap US Stock Fund.

The complaint notes that CenturyLink hired no fewer than six different investment firms to manage the large cap fund. However, in spite of their efforts the fund is reported to have underperformed the Russell 1000 Stock Index – identified as the benchmark – on a consistent basis. That underperformance, plaintiffs allege, exceeded two percentage points or more below the benchmark in every year since the investment option was created in 2012.

This, in deference to the stated objective of the large cap fund – which was, to “exceed the return of a broad market index of the largest 1,000 companies using an actively managed, multi-manager approach.”

Plaintiffs also allege the existence of a flaw that heightened risk for loss

However, it appears the strategy was not effective in meeting its stated objectives. Not only did the large cap fund underperform, say plaintiffs – but that a design flaw inherent with the fund “virtually guaranteed” that the fund would underperform.

“This design flaw was built-in by [CenturyLink], by using six different fund managers with the same mandate (five active and one passive),” the complaint states. “The odds of the five active managers outperforming the market in aggregate were highly remote due to the efficiency of the large cap domestic equity market and the difficulty of even one manager outperforming for more than a year.

“Because of the highly efficient nature of the large cap domestic equity market, companies are generally fairly valued and excess returns are hard to produce over time. Furthermore, the five active managers would inevitably take competing positions and cancel out each other’s strategy,” the lawsuit states. “Effectively, the fund managers will be trading stocks among themselves as one manager overweights a stock that another manager chooses to underweight.”

Retirement benefits Plan alleged to have floundered for five years

To wit, plaintiffs suggest that within the confines of such a market it was not a reasonable expectation that five active managers engaged in managing the funds would have any opportunity to over perform, in aggregate.

Plaintiffs in the class action employee stock lawsuit opine that CIM knew, or at least should have been aware that the inherent design of the large-cap fund was flawed and that the fund was underperforming, thereby limiting the returns for Plan participants. Alleged to be aware of the chronic underperformance and the design flaw, CIM is accused of breaching its fiduciary duties under ERISA by failing to take action to right the ship, as it were. Instead, CIM allowed the fund to flounder for five years without taking action, or so it is alleged.

“Even in an optimistic scenario, it would have only been reasonable to assume the strategy would effectively turn the actively managed large cap fund into an expensive large-cap domestic index fund,” plaintiffs suggest. “This also would have been unreasonable given the existence of the ‘US Stock Index Fund,’ a fund heavily weighted to large cap equities, as a plan option.”

Further, the large-cap fund “was one of only three stock funds offered by the Plan and the only large-cap stock investment option,” plaintiffs allege. “Moreover, the large-cap fund comprised up to 16 percent of the underlying investments in each of the target-date funds offered by the Plan, which reduced the performance of those funds as well.”

The Employee Retirement Income Security Act (as amended 1974) provides strict guidance to those tasked with managing investments within 401(k) plans. Managers are required to always put the investor first in the equation. It is the Plan manager’s fiduciary duty under ERISA, therefore, to undertake investments that are prudent and are made in the best interest of Plan participants. ERISA also assumes that when faced with a Plan that is chronically underperforming, it is the fiduciary duty of Plan managers to understand what is wrong and – once found – undertake steps to improve the situation on behalf of investors.

Lead plaintiff in the class action is Bonnie Birse. The lawsuit is Birse et al v. CenturyLink, Inc. et al, Civil Action No. 1:17-cv-2872 in the US District Court for the District of Colorado.


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