In addition to (and, sometimes, as part of) plaintiffs’ 401(k) plan fee lawsuits, some plaintiffs have sued sponsors challenging the prudence (under ERISA) of the use of money market funds as capital preservation vehicles. Plaintiffs have also filed suits against providers and (in at least one case, a plan sponsor) challenging stable value fund investment strategy. In this article we briefly review the status of this litigation and discuss two recent “wins” for plan sponsors, in Bell v. Anthem and Barchock v. CVS.
Claims that the use of a money market fund is imprudent
The complaints attacking the use of money market funds as capital preservation vehicles in 401(k) plans generally allege that stable value funds, because they are “conservatively managed to preserve principal,” serve the same function as money market funds (capital preservation) while outperforming them. It’s fair to say that these complaints verge on the assertion that, in a 401(k) plan, the use (in the fund menu) of a money market fund rather than a stable value fund for capital preservation is per se imprudent under ERISA.
Thus, in Bell v. Anthem, plaintiffs argued that “[b]ecause they hold longer-duration instruments, [stable value funds] generally outperform money market funds, which invest exclusively in short-term securities.” (citing Abbott v. Lockheed Martin Corp.) And that “[p]rudent ﬁduciaries of deﬁned contribution plans know that such minimally returning funds [i.e., money market funds] will not and have not kept pace with inﬂation.” They alleged that defendants “failed to make a reasoned decision whether to use a stable value fund.” And that retaining the plan’s money market fund, while failing to offer a stable value fund, “caused the Plan millions of dollars in losses compared to what the assets of the fund would have earned if invested in a stable value fund.”
In dismissing this claim (while allowing plaintiffs to go forward with their fee-related claims), the Anthem court stated that:
Plaintiffs argue that Defendants breached their fiduciary duty because an average stable value fund has dramatically outperformed the Plan’s money market fund, but despite the advantages, Defendants failed to provide a stable value fund. Plaintiffs also contend that, had Defendants considered a stable value fund and weighed the benefits, Defendants would have removed the Plan’s money market fund and provided a stable value fund. The Court concludes that Plaintiffs’ assertion is conclusory and is not enough to state a claim.
It’s not clear whether plaintiffs can improve on these sorts of conclusory allegations. Obviously investors generally see both money market and stable value funds as having a role to play in portfolio management. And nothing in ERISA mandates the inclusion in a plan’s fund menu of a capital preservation vehicle, much less a stable value fund.
Indeed, the “stable value funds do better” argument is, at base, really an argument that “they have done better.” No one would question that they present a different sort of risk than money market funds. So that, arguably, plaintiffs are basing their claims in these cases on hindsight.
The court in Barchock v. CVS found a similar flaw with plaintiffs’ claim that the CVS plan fiduciaries had imprudently invested the CVS plan stable value fund.
Stable value investment policy – Barchock v. CVS
Several cases have been brought against stable value providers, challenging their fee practices. In at least a couple of these cases, plaintiffs have challenged the firm’s stable value investment policy as imprudent. Thus, in Ellis v. Fidelity plaintiffs have argued that the firm pursued an “unduly conservative investment strategy that was contrary to the purposes of stable value fund investing,” resulting in a lower stable value crediting rate than a “prudent” investment strategy would have produced.
In Barchock v. CVS, plaintiffs brought a similar case against the plan sponsor (and the plan’s investment manager), claiming that defendants had “imprudently invest[ed] too much of the Plan’s Stable Value Fund assets in ultra-short-term cash management funds that provided extremely low investment returns.”
On April 18, 2017, the District Court for the District of Rhode Island granted defendants’ motion to dismiss in this case.
In support of their claim, plaintiffs argued that “when compared to other stable value fund investment averages (as documented in SVIA [Stable Value Investment Association] reports) the investment of the Fund in cash or cash equivalents ‘was a severe outlier and categorically imprudent.’” As the court observed, “Plaintiffs’ assertions [were] bolstered primarily by comparisons between investment characteristics of the Fund, i.e., the percentage of investments allocated to cash and the duration of investments, with investment averages of other stable value funds, as summarized in the SVIA Survey.”
In response, the defendants argued that:
“[B]y plaintiffs’ own account, the CVS Stable Value Fund was at all times structured to meet – and did in fact meet – its stated investment objectives: ‘to preserve capital while generating a steady rate of return higher than money market funds provide.’” … [U]nder those circumstances, Plaintiffs’ contentions that the Fund could have “predictably” earned higher returns by means of a different investment allocation, constitutes “improper hindsight critique.”
In finding for defendants (and dismissing plaintiffs’ case), the court criticized plaintiffs’ arguments as based on “20/20 hindsight.” And it rejected plaintiffs’ argument that “mere deviation from [the] average” supports an inference that a fiduciary’s investment strategy was imprudent.
Thus, in at least these two cases challenging money market/stable value investment policies, defendant plan fiduciaries have won. With respect to capital preservation funds generally, it remains to be seen what allegations/facts could provide a basis for a successful ERISA prudence lawsuit against a plan sponsor or sponsor fiduciaries.
A couple of observations –
In both these cases, plaintiffs’ claims were based on a “hindsight” analysis – comparing past performance, e.g., of money market and stable value funds. And on the average performance of comparison funds. These two courts are saying that those “facts” are not enough to support a claim that plan fiduciaries were imprudent.
These are cases challenging the prudence of investments, not fees. Absent an allegation of self-dealing or a clear violation of plan or investment policy procedures, courts may in these investment-prudence cases be prepared set a fairly high bar for plaintiffs to clear on a motion to dismiss.
We will continue to follow this issue.