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Last week, I wrote about a newly-handed-down Supreme Court ruling that determined that, in a case where pension plan participants were not actually harmed, they could not sue their former employer for mismanaging their pension. As something of a tangent, I observed that participants in multiemployer plans would indeed be harmed, because there is not the same structure in which the employer is obliged to make up the difference, but at the same time, I could name two cases in which the government pursued multiemployer plan officials for fraud for that very reason, without even needing to do any research.
As it happens, looking through old bookmarks, there was indeed a recent lawsuit about this very issue: in 2017, as a class-action lawsuit, musicians Andrew Snitzer and Paul Livant claimed that the trustees of the American Federation of Musicians and Employers’ Pension Fund had mismanaged the fund, and failed in its ERISA fiduciary obligations, by making excessively-risky investments, to such an extent that in January of this year (yes, pre-pandemic) they sought financial assistance from the Treasury Department, as well as permission to cut benefits as a “critical and declining” fund. (See a March 30 report from Deadline with statements from the plaintiffs’ attorneys and the plan trustees, as well a March 28 report at the Philadelphia Inquirer.)
Did the trustees gamble inappropriately? Maybe.
But the case alleges that this misconduct extended from 2010 to 2017 (that is, when the case was filed). And trustees of a multiemployer pension plan are different than, say, bankers who manage a 401(k) plan: it is part of the structure of a multiemployer plan that employers who participate, collectively select half of the trustees, and employees, via their union, select the other half. In other words, Snitzer and Livant may have individually had little control over their plan’s investment decisions (though the plan, like all such plans, is required to provide an Annual Funding Notice which includes information on asset allocation), but the union which represented them was, through its representatives, an equal partner in these decisions.
What’s more, it was not the plan itself against whom the lawsuit was targeted (which would have been nonsensical) but the trustees, in their personal capacities. (The full set of documents can be read online.) And the outcome? A settlement, in the amount of $26.85 million, one-third of which will be paid out to the lawyers, along with an additional $900,000, $10,00 each for the two plaintiffs, and the remainder, about $17 million, will be directed to the pension fund. In addition, the fund will change its investment manager and agree to governance oversight for 4 – 5 years.
In principle, that $27 million comes out of the pockets of the trustees. In reality, it comes from insurance: from a fiduciary liability insurance policy similar to the one offered by, and explained by Chubb (here, or in more detail here).
So who won, and who lost? Did the plan participants get $17 million in “free money” going to their fund to help shore up losses? In one sense, yes. But it cost, collectively, all participants of multiemployer plans whose trustees purchase insurance, and whose premiums must cover this $17 million plus $10 million in profits for the lawyers, plus the new charges actuaries will build in on the expectation that lawyers will use this success as grounds for more lawsuits in the future.
As a reminder, too, in a multiemployer plan, these costs are not coming out of the deep pockets of a corporation. The $10 million attorney’s fees, or the premium hikes in the future, come from contributions, nominally from employers, but in reality from employees as they forgo benefit accrual or pay increases in the collective bargaining agreements with employers.
And, again, that’s without commenting on whether the plan’s investment strategy was prudent and wise. But it is a reminder that it is the obligation of participants in a multiemployer plan, through the governance structure in which unions select half the trustees, to ensure the plan is governed properly, or, more specifically, that the risk level of investments is well-understood and accepted by all stakeholders. There is simply no do-over, in circumstances such as these.
As always, you’re invited to comment at JaneTheActuary.com!