Judge Dismisses ERISA Suit Against Fidelity Stable Value Decisions

The suit accused the firm of engaging in imprudent investment strategies for the Fidelity Group Employee Benefit Plan Managed Income Portfolio Commingled Pool (MIP). 

A judge in the U.S. District Court for the District of Massachusetts this week dismissed an Employee Retirement Income Security Act (ERISA) lawsuit filed against Fidelity Management Trust Company over the management and monitoring of a stable value fund offered to 401(k) plans.

The suit, Ellis vs. Fidelity Management Trust Co., accused Fidelity of engaging in imprudent investment strategies for the Fidelity Group Employee Benefit Plan Managed Income Portfolio Commingled Pool (MIP), a stable value fund offered as an investment option in some 401(k) plans for which Fidelity was trustee.

According to the lawsuit, during a specified class period, the MIP had “such low investment returns and high fees that it was an imprudent retirement plan investment.” The weak performance and high fees of the MIP were the result of the intentional actions and omissions of Fidelity as trustee of the plans, the suit alleged. Fidelity delegated day-to-day management of the MIP to its affiliate, Fidelity Management and Research Company, and the lawsuit accused Fidelity of failing to continuously monitor and supervise its affiliate. Among other issues, plaintiffs claimed this lack of prudence and monitoring resulted in the stable value fund purchasing excessive wrap insurance that unnecessarily dampened return prospects and resulted in conflicts of interest.

In a statement to PLANADVISER, Fidelity said it intended to defend itself vigorously against the claims, which it has now done successfully. Technically speaking the suit has been dismissed on summary judgement, due to the fact that “the plaintiffs have failed to establish a breach of either duty of loyalty or the duty of prudence.”

The text of the court’s decision goes into significant detail about the investment and monitoring process Fidelity used in managing the stable value fund in question. The plaintiffs had argued that Fidelity acted in its own self-interest by agreeing to overly stringent wrap insurance guidelines that sacrificed the competitiveness of the portfolio, while allowing Fidelity to grow its assets under management. Specifically, the plaintiffs alleged that Fidelity had a financial incentive to “increase its stable value AUM and to amass wrap capacity to improve its competitive position and increase its management fees, and that Fidelity pursued these aims rather than acting in the plaintiffs’ best interests.”

Fidelity responded that the plaintiffs do not in fact present evidence that Fidelity put its interests ahead of the portfolio’s, and thus cannot establish a breach of the duty of loyalty. Fidelity further argued that because the plaintiffs have not disputed that stable value funds need wrap coverage or that Fidelity was facing the potential withdrawal of several of the portfolio’s wrap providers in 2009, to prove a breach of the duty of loyalty, the plaintiffs need to show that the portfolio did not need additional wrap coverage and that the new wrap guidelines to which Fidelity agreed were overly conservative.”

This argument proved persuasive for the Massachusetts district court: “Because the plaintiffs fail to carry their burden of proof, this court grants summary judgment on the issue of whether Fidelity breached the duty of loyalty.”

 NEXT: More from the text of the judgment 

The court’s decision draws an important distinction regarding ERISA duties that plan officials will do well to consider: “ERISA section 404(a) requires an ERISA fiduciary to honor the duty of loyalty by discharging his duties with respect to a plan solely in the interest of the participants … This duty, however, is not limitless.” As the decision lays out, the First U.S. Circuit Court of Appeals “has noted an accompanying benefit to the fiduciary is not impermissible—it more simply requires that the fiduciary not place its own interests ahead of those of the plan beneficiary.” That precedent was set by the 2014 case, Vander Luitgaren v. Sun Life Assurance Co. of Canada.

Accordingly, to succeed on a claim for breach of the duty of loyalty, a plaintiff needs to show that the fiduciary served an interest or obtained a benefit at the expense of the plan beneficiaries.

The district court’s judgement continues: “Although the plaintiffs emphasize facts that would normally lead to the reasonable inference that Fidelity acted to increase wrap capacity rather than to pursue the investors’ interests, the plaintiffs fail to carry their burden because they do not point to any excess wrap insurance for the portfolio.”

The court was also apparently swayed by Fidelity’s arguments to the effect that the duty of prudence in fact forced it to purchase the wrap coverage at question here: “The parties agree that in or around 2009, Rabobank and AIG decided to exit the wrap business. Both of these companies provided wrap coverage for the portfolio. Although the plaintiffs assert that in 2009, the portfolio was not affected by a lack of wrap capacity because it was ‘open to new plans, business as usual,’ the plaintiffs do not cite evidence to support the argument that Fidelity did not need replacement coverage or that the pending termination of Rabobank and AIG’s wrap coverage was no longer an issue for the portfolio.”

In fact, Fidelity did not secure replacement wrap coverage until 2012, the decision explains.

“Even taking all reasonable inferences in favor of the plaintiffs, this court cannot conclude on the basis of the facts before it that the portfolio’s need for replacement wrap coverage had somehow dissipated,” the district court concludes. “The plaintiffs also fail to show that Fidelity entered into unduly conservative wrap guidelines. Although they assert that Fidelity agreed to overly stringent wrap guidelines in order to obtain more wrap capacity, Fidelity successfully counters that the plaintiffs have not set forth evidence that any of the portfolio’s wrap guidelines were unreasonable.”

The full text of the lawsuit, which includes extensive analysis of the monitoring and investment process surrounding Fidelity’s stable value wrap coverage decisionmaking, is available here