Republic Mortgage Insurance Co. to Settle ERISA Lawsuit for $650,000

The Allison plaintiffs, who were participants in the Republic Mortgage Insurance Company and Affiliated Companies Profit Sharing Plan (the Plan), alleged that Plan fiduciaries’ failure to monitor investments and other misdeeds cost the Plan $1.3 million. The settlement amount will restore roughly half of the plaintiffs’ losses and will be allocated among the plaintiffs in proportion to their account values.

The longer story, including the failure of Republic Mortgage Insurance Co. (Republic), is part of the lingering fallout from the financial crash of 2008. As a consequence of the financial crisis of 2008, hundreds of American companies failed; many more were damaged beyond repair. Republic was one of the casualties.

But so were the participants in the Plan. They will recover some of their losses, but those who lost half of their retirement savings have also been badly harmed.

Bad situation gets worse

Republic sold mortgage insurance. Like many other businesses exposed to the housing market, it was severely affected by the 2008 housing-driven financial crisis. It never regained its pre-2008 financial health.

Republic stopped writing new insurance policies in 2011 when it failed to meet North Carolina’s solvency requirements. Republic then laid off roughly half of its staff, which triggered a partial termination of the plan under ERISA regulations. This partial termination then triggered a market value adjustment of the account balances of the participants whose employment had been terminated. Financial management was effectively taken over by its parent company, Old Republic International Corporation (ORI). Between 2012 and 2022, ORI guided Republic through a “run-off” of its remaining mortgage business.

By 2021, many of the participants’ profit-sharing accounts, especially those that had been invested in the seemingly safe Guaranteed Interest Account (GIA) investment option, began to lose significant value. In 2023 Republic suspended contributions to the Plan, pending the company’s sale to a third party. In July 2024, all Plan accounts were transferred to the ORI Plan. The transfer caused savings held in the GIA to be liquidated in a high interest environment. Overall, the plaintiffs assert that the accounts invested in the GIA investment option lost 9 percent of their value. This was an especially bad surprise to many of them.

Blindsided

Allison claims that the Plan’s fiduciaries:

• failed to monitor the performance of the GIA,
• certified false statements about the risk of loss to participants who had invested their retirement savings in the GIA; and
• failed to act in 2021 to prevent the $1.3 million loss to the Plan.

The plaintiffs also claim that they did not know about and could not have discovered the underlying factors that caused the loss to the Plan.

ERISA’s duty of prudence

Section 404 of ERISA requires plan fiduciaries to discharge their duties with respect to a plan solely in the interest of the participants and beneficiaries, acting with the care, skill, prudence and diligence that a prudent person familiar with such matters would use in the conduct of a similar enterprise. This is often referred to as the “prudent expert” standard.

Nonetheless, the fiduciaries of profit-sharing plans do not guarantee the value of participant accounts. This is especially true of those that permit participants to direct the investment of their accounts among several different options, as the Republic Plan did.

Republic moved to dismiss the lawsuit. The company argued that the plaintiffs’ position, which was that the fiduciaries should have anticipated the loss in value as early as 2021, is hindsight-driven speculation – a “could have/should have” kind of argument. In April, the Middle District of North Carolina found that the plaintiffs’ argument was plausible enough to proceed to trial. With that, settlement negotiations began in earnest.

The self-directed 401k profit-sharing plan problem

When times are good and a self-directed plan’s investment options are sound, some financially sophisticated retirement savers embrace the challenge of investing for themselves. When times are tough or the investment options are questionable, the fun evaporates. And frankly, not all plan participants have the knowledge necessary or the interest in being their own amateur investment advisor.  

This is the central problem with self-directed plans. Many see this as a flawed design that shifts risk away from the business sponsoring the plan to the participants, who are likely less able to handle the loss when something like the 2008 financial crisis hits.