According to the complaint, from at least September 30, 2007, to December 31, 2010, the defendants caused the plan to invest approximately 100% of its assets in one asset class: equities. The suit alleges this “inappropriately risky and undiversified” investment allocation strategy served the interest of the defendants rather than the plan and its participants, exposed the assets of the plan to risk of large loss and caused significant losses to the plan.
The complaint states: “The Compensation and Investment Committee Defendants failed to prudently and loyally balance the need to generate investment returns with the need to safeguard principal through proper risk management and diversification among different asset classes.”
In the complaint, U.S. Bancorp’s pension plan allocation to 100% equities is compared to an average asset allocation for the top 100 defined benefit (DB) plan plans at year-end 2007 of 59% equities, 30% fixed income/debt securities, 1% cash, 3% real estate and 7% other asset classes. The lawsuit contends that as a result of the several violations of the Employee Retirement Income Security Act (ERISA) committed by plan fiduciaries, the plan lost $1.1 billion in 2008 and plummeted from being 144% funded at the end of 2007 to being 84% funded at the end of 2008.
The participant also accuses the Compensation Committee Defendants and the Investment Committee Defendants of failing to adequately monitor the plan’s investments and failing to take appropriate steps to remove the plan’s investment manager, FAF Advisors, which was a subsidiary of U.S. Bancorp. The complaint states the investment strategy used by the plan served the company and FAF Advisors’ own interest to the detriment of the plan and its participants, because FAF invested more than 40% of the plan’s assets, or $1.25 billion, in its own mutual funds, and the remainder of the portfolio in equity securities that supported FAF Advisors’ own securities lending program.
Per the securities lending program, FAF Advisors had a duty to reinvest the plan’s cash collateral only in conservative, high quality, low risk investments (akin to money market funds) so as to fully protect the collateral from principal losses. However, FAF invested the collateral the plan received in two securities lending portfolios which were also managed by FAF and invested in highly risky, low quality assets-backed commercial paper issued by three structured investment vehicles that were backed by subprime mortgage and Alt-A securities.
“As a result of FAF Advisors’ mismanagement and fraudulent acts, the Plan collateral held under securities lending arrangements declined in value by more than $14 million in 2008,” the complaint states.
The lawsuit seeks an order requiring each fiduciary found to have breached a fiduciary duty to the plan to jointly and severally pay such amount to the plan as is necessary to make the plan whole, as well as an injunction preventing the fiduciaries of the plan from engaging in this investment allocation strategy in the future, and an order removing these fiduciaries from their role as fiduciaries for the plan.
Last month, a federal district court gave the green light to certain claims that fiduciaries to Weyerhaeuser Company’s pension plans breached their duties by overinvesting the plans’ assets in alternative investments (see “Court Moves Forward Part of Case over Alternative Investments”).
The complaint against U.S. Bancorp is here.