Investment Manager on the Hook for Poor Retirement Plan Diversification

A court ordered the investment manager to pay losses to the plan as well as pay back investment management fees.

By John Manganaro | September 29, 2016
Page 1 of 2 View Full Article

The 2nd U.S. Circuit Court of Appeals has affirmed a lower court’s ruling in Severstal Wheeling Retirement Committee v WPN Corporationa complicated but informative example of retirement plan litigation that considered the extent of a plan fiduciary’s duty to diversify investments, as well as the allocation of liability among plan managers.

By way of background, WPN Corporation and its lead executive Ronald LaBow are named fiduciaries of two defined contribution plans sponsored for the employees of a company called Severstal Wheeling Inc. The plaintiffs in the initial suit include Severstal Wheeling Inc. Retirement Committee and other named fiduciaries of the plans, who sued WPN and LaBow on behalf of the plans for breaches of their fiduciary duties.

Until late 2008, according to case documents, the plans were funded and maintained through a trust sponsored by the WHX Corporation. The combined trust pooled the plans’ assets with assets from other employee benefit plans sponsored by WHX. After Severstal Wheeling, Inc. separated from WHX, a portion of the assets was transferred from the Combined Trust to a separate trust holding the plans’ assets. Before and after the transfer, the plans were managed by WPN, whose sole employee was LaBow.

The main charge of wrongdoing was that WPN and LaBow did not put into action demands by the investment committee to diversify and otherwise properly manage participant assets. According to the district court opinion, the committee testified that LaBow’s account of whether and how the plans could be diversified was “an ever evolving story of what could or could not be done” that “seemed to change just about during every conversation.” 

Crucially, the judge also found that governing documents did not give LaBow and WPN the option of abdicating responsibility to the retirement plans’ committee. LaBow argued that he met with several impediments to diversifying the plans’ assets, including that not all assets the committee wanted were available, that he was not given an investment policy to guide him and that the custodian of the trust did not recognize his authority to direct investments. The bench trial judge was persuaded by testimony of several experts to reject these arguments, case documents show.

The court ordered the investment manager to pay the plans $9,710,438, including disgorgement of the $110,438 paid in investment management fees during the period, plus $5,305,889.74 as prejudgment interest. 

NEXT: Details from the appellate decision