Former employees sue Aerotech over conservative investments
The stock market wasn’t just breaking records from June 2018 to June 2023 — it was shattering them like a bull in a china shop.
Meanwhile, trustees appointed to invest funds for employees of Aerotech Inc., were playing it safe.
According to a recent lawsuit filed in federal court, they took an overly conservative approach by putting all the investment funds in low-risk, low-yielding money market accounts and certificates of deposit.
“The trustees should have been investing in equity investments,” said Carl Engstrom, a Minneapolis attorney representing three former employees of Aerotech in a lawsuit against the company, its employee stock ownership plan and the trustees who manage it.
“Participants in the plan are owed fiduciary duties under the federal law governing employee benefits,” he said.
According to the lawsuit filed April 24 in federal court in Pittsburgh,
the former employees didn’t actually lose money, but believe they could have earned a lot more if it wasn’t all sitting in cash investments earning an average 1.46%. They allege that the employee
stock option plan, or ESOP, earned $778,539 from its cash investments between June 2018 and June 2023, while the plan would have earned 10 times more — around $7.7 million over the same time — if the money had been placed in an index fund tracking the S&P 500.
“Defendants’ fiduciary neglect cost ESOP participants $6.9 million during this period, or more than $17,000 per participant,” the lawsuit said.
Representatives from Aerotech declined to comment for this story.
The class action lawsuit highlights the age-old debate of risk versus reward in investing.
Risk tolerance
Stocks, with their rollercoaster highs and lows, represent the essence of risk, with a possibility for either steep losses or stellar returns.
On the other hand, cash-like investments such as money market accounts and certificates of deposit are safe, but offer lower growth over time.
Financial advisers say the right choice between risk and safety hinges on an individual’s risk tolerance and how long their time horizon is before retirement, in the context of the stock market’s volatility.
The Department of Labor, which oversees employee retirement plans, also recognizes that investments made in retirement plans should be long-term investments and warns that overallocation to conservative investments could lead to less than adequate retirement savings.
“We’re talking about a place where the majority of the employees are in their 40s or younger, and most of them are 20 years plus years from retirement,” Mr. Engstrom said.
“Based on the long-term performance of the stock market compared to other assets, they should have been investing in equity investments,” he said.
Aerotech, one of the largest and most successful companies at RIDC Park in O’Hara, is organized as an employee stock option plan, or ESOP.
The company engineers and manufactures motion controls for electronics, medical devices, lasers, semiconductors and other
applications. It has 673 workers, according to RocketReach, a workforce database.
Currently, more than 50 companies in the Pittsburgh region are employee-owned. Statewide, there are about 300 employee-owned companies, according to consulting firm Business Transaction Advisors.
Violating fiduciary duty?
Here’s how employee stock ownership plans work:
A company owner sells the company to a trust that controls the employee shares. Employees do not purchase shares, but instead, the shares are allocated to them based on their pay and length of service. The trustee appointed to oversee the ESOP makes most of the decisions, except on major issues like the sale of the company.
The employee stock ownership consists of two parts. One part is Aerotech company stock. The other part is called “other investments account,” and can be any investment the trustees choose.
Mr. Engstrom said company
A 6% average annual return differential between cash and stocks over the next 30 years will produce a retirement savings deficit of between $175,000 to $400,000 for an ESOP participant with a $28,000 OIA balance today.” Plan participant lawsuit
stock accounts for around 80% of the value of Aerotech’s ESOP shares and it’s solely based on the performance of Aerotech stock. ‘Other investments account’ makes up around 20% of the total account value.
“So, if the 20% is in cash, that will weigh down the returns and they will make less than if the 20% were invested in longer-term investments,” he said.
Aerotech also sponsors an employee 401k plan that is separate from the ESOP. However, the company makes no contributions to employee 401k plans. The company’s cash contributions go to the ESOP, which are held in employees ‘other investments account’.
The lawsuit by former Aerotech employees Stephanie Schultz of West Mifflin, Kevin Plummer of West Leechburg and Chad Huffer of Woodstock, Ga., alleges that the Trust Committee violated its fiduciary duty under ERISA to act in the best interest of the plan participants.
Their position is they would have had higher balances when they cashed out if the trustees had invested in stocks instead of cash.
“Cash equivalents are appropriate only if the investor has a shortterm investment objective, needs to preserve their principal balance and cannot tolerate market risk,” the lawsuit reads. “These investments are not designed or expected to provide competitive long-term growth needed by retirement plan participants.”
Lawsuit: Strategy needs to be changed
Plan participants can expect more missed opportunities if the low-yield, low-risk investment strategy doesn’t change, the lawsuit said.
“The average ‘Other Investment Accounts’ participant balance during the subject period was around $28,000,” the lawsuit said.
“A 6% average annual return differential between cash and stocks over the next 30 years will produce a retirement savings deficit of between $175,000 to $400,000 for an ESOP participant with a $28,000 OIA balance today.”
The plaintiffs pulled investment data from other ESOP plans to highlight the abnormality of a long-term cash investment strategy, the lawsuit claims.
According to the lawsuit, the fiduciaries of Great Lakes Cheese Co., ESOP have kept approximately 95% of their plans as “other investments account” invested in common stocks from June 2018 to June 2023.
The fiduciaries of the SCS Engineers ESOP have kept upward of 60% of its “other investments account” invested in common stock, and the remainder in real estate and bonds.
Meanwhile, Aerotech’s trustee committee has been using cash from the “other investments account” to repurchase Aerotech stock from departing participants and then reallocating those shares to current participants, according to the lawsuit.
“Defendants caused the ESOP to repurchase an average of around $3.5 million to $4 million of Aerotech stock per year from departing participants between June 30, 2018 and June 30, 2023,” the lawsuit said.
Mr. Engstrom said courts compare employee retirement plans to each other in these kinds of cases.
“The law determines the standard of conduct for a fiduciary retirement plan depending upon what other retirement plan fiduciaries do acting under similar circumstances,” he said.
“Those examples are not just useful for illustrative purposes. They actually also shape the law in this area.”