J.P. Morgan to Shed Mortgage Debt Investments

April 4, 2012 (PLANSPONSOR.com) - A Hospira Inc. employee filed a lawsuit on Tuesday alleging the company’s 401(k) investment in private mortgage debt violated the Employee Retirement Income Security Act (ERISA). 
Hospira’s 401(k) plan includes investments in J.P. Morgan’s stable value fund. Also on Tuesday,J.P. Morgan Chase & Co. announced it will shed mortgage debt from its stable value fund.

Joseph Peiffer, an attorney with Fishman Haygood Phelps Walmsley Willis & Swanson LLP, one of the law firms representing the plaintiff in the lawsuit, told Reuters, “We believe J.P. Morgan violated its fiduciary duty by taking risky private mortgages from their books and putting the risks on retirees.”

According to Reuters, the $1.7 billion J.P. Morgan Stable Asset Income Fund has invested as much as 13% in private mortgage debt underwritten by the bank itself.

As of Tuesday, J.P. Morgan cut its mortgage exposure to approximately 4%, but the industry average for all private placements—mortgage and other privately placed securities—in stable value funds is only about half a percent, according to Hueler Analytics Inc., reports Reuters.

Typically, stable value funds consist of bond funds wrapped in an insurance contract, which guarantees the initial investment. These funds generally return between 2% to 3%, while money market funds have been returning close to zero.

In the years leading up to the 2008 peak of the financial crisis, some fund managers invested in less liquid, higher-yielding investments to boost returns. Experts say that such investments have no place in stable value funds, which are supposed to be as liquid as money market funds.

Several other plans have faced lawsuits over mortgage-backed investments (see “Court Limits Wachovia's Defenses in Suit over Mortgage-backed Investments,”“Court Dismisses Claims against State Street over Mortgage-Backed Investments” and “Morgan Stanley Cleared of Breach over Mortgage-Backed Securities Holdings”).