UPDATED with statement from the plan’s executive director: The American Federation of Musicians’ deleaguered $2 billion pension plan, which had a $122 million shortfall last year, has been hit with a class-action lawsuit that claims its trustees have made a series of risky investments that have endangered the pensions of thousands of musicians. The suit, filed in the U.S. District Court in Manhattan, seeks the appointment of an independent fiduciary to administer the plan and the management of its investments.
Like many multi-employer pension plans, the AFM plan was hit hard by the recession and market downturn of 2008. But the musicians’ plan was hit harder than most, losing 40% of its value in 18 months. A lawsuit filed by musicians Andrew Snitzer and Paul Livant in New York District Court claims that the plan’s trustees and investment committee tried to make up for this staggering loss by investing in questionable stocks.
“With the fund in critical status resulting from bad investment decisions,” the 66-page suit claims (read it here), “defendants chased recovery of lost investment returns by repeatedly gambling on the hope of high investment returns from the highest risk asset classes, in breach of their fiduciary duties under the Employee Retirement Income Security Act. Defendants failed to prudently invest hundreds of millions of dollars of fund assets and monitor and manage risk tolerance and exposure in the stressed financial circumstances facing the fund.”
Maureen Kilkelly, executive director of the pension plan, called the suit “entirely without merit,” saying that the board of trustees and staff of the fund “have always taken our fiduciary responsibilities very seriously. Every step of the way, we have consulted with respected and experienced investment experts in the industry, closely reviewed investment options, and always acted in the best interests of the fund’s nearly 50,000 participants and beneficiaries.”
According to the lawsuit, “Defendants invested approximately $243.5 million of the fund’s assets over the period since 2010 in high-risk, high-cost international emerging markets equities, gambling on outsized growth in international emerging markets’ economies and coincident investment returns consistent with returns in the previous decade. Defendants further gambled on the investment managers they hired to outguess the market and produce better returns for their excessively high costs and fees. As the investment lost market value, defendants chased recovery of the lost returns with further fund assets. Defendants knew, or should have known, this continuing and increasingly risky gamble exposed the fund to imprudent and excessive risk when the fund’s returns were vital to recovery.”
The suit claims that the trustees tried to recoup losses by investing ever greater percentages of the fund’s assets in risky emerging markets equities. “Defendants knew the average pension plan had 4.5% of total assets invested in emerging markets equities,” it alleges. “Defendants approved a policy to invest up to 5% of total Fund assets in emerging markets equities, and then, following negative returns, more than doubled the high risk investment to 11%, only to again double-down and increase the fund’s investment to an extraordinary 15% of fund assets. Defendants’ process of chasing recovery of lost returns with increasingly risky asset allocations, in an attempt to meet or beat the actuarial return assumption, was imprudent and resulted in substantial injury to the fund. Like a gambler chasing his losses, defendants did so despite the high-risk nature of the asset class, substantial and continuing declines in the market value of the investment, increased uncertainty concerning volatility and growth prospects in emerging markets, substantial underperformance by the managers, substantial underperformance of the fund versus its peers, and the mounting substantially negative impact of the investment on the fund’s returns.”
In December, the trustees told participants that the fund “has now been in critical status for six years and is projected to remain so for the foreseeable future…We currently have a plan that incorporates reasonable measures available under the law to address our situation. At this time, we are reliant on the fund’s investment performance and to a much lesser extent employer contributions.”
In her statement to Deadline, the plan’s exec director Kilkelly said the suit “is directed at the performance of fund investments, but there are many other causes of the fund’s present financial predicament. Many multiemployer pension plans across the nation are struggling with a similar ‘perfect storm’ of challenging factors. These include the volume of Baby Boomers taking retirement; more benefits being paid out to retirees and beneficiaries than contributions coming in from actives; and significantly longer pay-outs because participants are thankfully living longer. Additionally, two major recessions since 2000, the one in 2008-09 being of epic proportions and causing the collapse of financial markets worldwide, have profoundly impacted pension plans across the nation.”
She said that she and the trustees and the staff of the fund “have responded prudently to all challenges and have consistently based their decisions on the counsel of proven investment advisors and actuaries. We will vigorously contest this lawsuit, and expect to prevail. Our focus will continue to be on doing everything we can to preserve the hard-earned benefits of our participants and beneficiaries.”