Court Moves Forward Part of Case over Alternative Investments

September 5, 2013 ( – A federal district court has given 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.

U.S. District Judge Robert S. Lasnik of the U.S. District Court for the Western District of Washington dismissed plaintiffs’ legal claims for monetary relief for lack of standing. However, he said the plaintiffs’ may pursue claims for injunctive relief related to the deprivation of specific statutory rights and protections.

The plaintiffs allege, among other things, that defendants violated the clear and explicit statutory requirement under the Employee Retirement Income Security Act (ERISA) that they “diversify the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so.”  They also allege defendants violated § 1104(a)(1)(A) and § 1106(b)(1) when they created and executed the challenged investment policy not for the exclusive benefit of the plan participants and their beneficiaries, but in order to increase Weyerhaeuser’s net income and stock prices for the benefit of the company and its senior executives.

The court found the deprivation of these statutory rights and protections gives rise to a sufficiently concrete and particularized injury to allow plaintiffs to seek injunctive relief, even if they cannot establish that pecuniary harm has occurred. Lasnik cited the 9th U.S. Circuit Court opinion in Shaver v. Operating Eng’rs Local 428 Pension Trust Fund, which noted that to hold otherwise would leave the beneficiaries powerless to rein in the fiduciaries’ allegedly imprudent behavior until after actual damage had been done.

“[P]laintiffs have alleged fiduciary self-dealing in violation of express rights and protections set forth in ERISA that could be remedied through a favorable ruling. The Court finds…that equitable relief is available in these circumstances to rein in the alleged abuses and statutory violations, even if no monetary loss has yet occurred,” Lasnik wrote in his opinion.

As for the plaintiffs’ claims for monetary relief, according to the court opinion, they rely on the Declaration of Ian H. Altman for the proposition that Weyerhaeuser’s plan was funded at only 76% or 85.5% at the time the action was filed. However, Lasnik said Altman’s analysis is unpersuasive as he ignores ERISA’s minimum funding standards (the Adjusted Funding Target Attainment Percentage or “AFTAP”) in favor of a comparison of numbers taken from Weyerhaeuser’s SEC (Securities and Exchange Commission) reports and the application of the Pension Benefit Guaranty Corporation’s method for calculating plan assets and liabilities upon termination. Altman did not explain why the court should reject the funding analysis specified by the statute at issue for determining how well a plan is funded on a particular date.

In the alternative, Altman utilized the AFTAP and concluded the plan was underfunded or on the verge of becoming underfunded at the time the action was filed. But, the court noted at most, the plan was underfunded by less than 1.5% at some point in mid-2011. “There is no evidence that such a modest deficit of a multi-billion dollar plan posed any threat to its continued viability or its ability to make payments to plaintiffs. In fact, when Mr. Altman mentions adverse impacts of underfunding—such as the inability to pay lump sum benefits and/or the need to freeze the accrual of new benefits—he is talking about plans that have fallen below 80% and 60% of the target, respectively,” Lasnik wrote.

Lasnik concluded there is no indication that a funding gap of, at most, 1.5% had any impact on any aspect of the plan or that Weyerhaeuser was not more than capable of making up any shortfall as required, so even if the court assumes the plan were slightly underfunded at the time the action was filed, plaintiffs still lack standing because the modest shortfall posed no threat to their present or future benefit payments.

In addition, plaintiffs argue they will, in fact, benefit from the relief requested in this lawsuit because every additional dollar added to the corpus of the plan will reduce the risk of plan default or termination. Lasnik noted that any “risk” of plan default or termination is highly speculative, and in order for plaintiffs to be at risk of suffering actual loss, the challenged investment policy would have to result in far larger losses than the plan actually experienced (even in 2008 to 2010 when the mortgage crisis was most acute), Weyerhaeuser would have to be unable to make up any shortfall, the plan would have to terminate in an underfunded state, and the Pension Benefit Guaranty Corporation would have to refuse to pay full benefits to the named plaintiffs. “Some quantum of reduction of a highly speculative risk does not provide the kind of ‘concrete and particularized’ injury required,” Lasnik wrote.

In their lawsuit, plaintiffs said a master trust for the Salaried Plan and the Hourly Plan held net assets of approximately $3.75 billion as of December 31, 2009, of which more than 81% were in alternative investments (including 53% in hedge funds and 24% in private equity). The complaint says the master trust held approximately 330 different hedge funds, private equity investments and real estate funds, and contends it was nearly impossible for the defendants to properly manage the risk of 330 alternative investments to ensure that such investments resulted in no more risk than the targeted benchmark (see “Pension Plan Participant Sues over Alternative Investments”).

The opinion in Palmason v. Weyerhaeuser Company is here.