A recent analysis published by Nancy Ross, partner and head of the Employee Retirement Income Security Act (ERISA) litigation practice at Mayer Brown LLP in Chicago, in collaboration with Samuel Block, associate member of the litigation and dispute resolution practice, offers helpful guidance for retirement plan fiduciaries thinking about making changes to their stable value or money market funds in 2018.
As the pair writes, “even though there is no typical stable value fund, there are three typical types of lawsuits filed against fiduciaries offering stable value funds.” In the last several years, fiduciaries have been sued for offering a stable value fund that is too risky; for offering a stable value fund that is not risky enough; and finally for not offering any stable value fund at all.
“Only Goldilocks, it seems, could safely offer a stable value fund,” the pair jests. “Considering the litigation risks for fiduciaries who do not set the stable value fund just right—a task that always looks easier in the hindsight of a lawsuit—a fiduciary may conclude the best option is not to offer a stable value fund at all.” Yet, as noted, fiduciaries have also been sued for not offering a stable value fund.
So far, plaintiffs have already been successful on claims suggesting their fiduciaries took too much risk with stable value investments. Notably, plaintiffs successfully sued JP Morgan Chase, arguing their stable value fund products invested in risky, highly leveraged assets—particularly, mortgage-related assets like mortgage-back securities. As Ross and Block recount, the district court first certified a class of participants in more than 300 retirement plans that were invested in 78 stable value funds. Ultimately, JP Morgan Chase paid $75 million to settle the lawsuit, the attorneys warn.
Plaintiffs have not yet succeeded with employer-directed claims that stable value assets were not invested in a risky enough manner, Ross and Block say.
“Plaintiffs have brought such lawsuits against Union Bond & Trust, Fidelity Management Trust, CVS Health, Massachusetts Mutual Life Insurance, and Prudential Retirement Insurance & Annuity, to name a few,” Ross and Block write. “In CVS, for example, the district court judge dismissed the claims, holding that fiduciaries need not predict the future and are not liable for deciding to avoid risks that, in hindsight, could have been tolerated. Nor must fiduciaries look at the average stable value fund and provide the same.”
Ross and Block argue that, when assessing the risk of a stable value fund or any other investment in the fiduciary context, “what matters is if the risk of the investment matches the plan’s investment objectives.”
“In Chevron, the fiduciary included a money market fund instead of a stable value fund,” Ross and Block report. ‘The court dismissed the case upon concluding that offering a money market fund as one of an array of mainstream investment options along the risk/reward spectrum satisfies ERISA’s prudence requirement.”
Ross and Block conclude, despite some early successes in these cases, that the increase in litigation “cautions plan sponsors to carefully evaluate the prudence of offering a stable value fund as part of a diverse investment portfolio.”