MassMutual Wins Lawsuit Over Stable Value Fund Spread

A judge found the plaintiff in the lawsuit was bound by a prior settlement agreement and that MassMutual did not violate that settlement agreement.

A federal district court judge has enjoined a retirement plan participant from filing a claim against Massachusetts Mutual Life Insurance Company (MassMutual) over the “spread” its stable value fund offering received.

The participant filed the lawsuit on behalf of the Arthur J. Gallagher & Company Savings and Thrift Plan and all other similarly situated Employee Retirement Income Security Act (ERISA)-covered employee benefit plans. The suit alleged that MassMutual collects excessive and undisclosed revenue in relation to stable value accounts it offers to retirement plans by crediting those accounts an interest rate (the “crediting rate”) below the defendant’s internal rate of return (the rate defendant itself earns on the invested capital in its general account), thereby earning excessive “spread.” The complaint was originally filed in Connecticut, but was moved to Massachusetts.

In Massachusetts, MassMutual sought to enjoin the participant from bringing the action in light of a previous lawsuit settlement agreement. The U.S. District Court for the District of Massachusetts held that her claims, as pled in the original complaint, were barred by the settlement agreement. 

“Nevertheless,” the court explained, “as defendant itself has suggested [in the briefing], plaintiff may have a remedy by suing under the theory that defendant breached the settlement by failing to comply with Section IV, regarding defendant’s promises to change its business practices.”

Prior settlement agreement

On June 25, 2015, following two fairness hearings, the Massachusetts court approved a settlement agreement in Golden Star, Inc. v. Massachusetts Mutual Life Insurance Co., an ERISA class action. In Golden Star, the plaintiff had asserted a variety of claims related to MassMutual’s fees and compensation in servicing retirement plans pursuant to group annuity contracts, including similar allegation regarding spread and stable value investment options as the participant asserts in the current case.

The parties in Golden Star reached a settlement agreement and sought court approval on behalf of two classes. The court granted final approval of the settlement agreement, which indeed provided relief to two classes. First was a monetary relief class, defined as “all current and former retirement plans that are or were serviced by MassMutual pursuant to a group annuity contract from October 19, 2005, through the date of the court’s preliminary approval order.” The second class was a structural changes class, defined as “all retirement plans that receive services from MassMutual pursuant to a group annuity contract on or after the date of entry of the preliminary approval order.” Pursuant to the settlement, MassMutual paid nearly $9.5 million to the monetary relief class, and for the benefit of the structural changes class, agreed to make certain changes to its 401(k) plan administration, including changes to the manner in which it disclosed fees.

“It is undisputed that the Gallagher Plan (and its participants, including plaintiff) is a member of both classes,” U.S. District Judge Mark G. Mastroianni wrote in his latest opinion.

According to Mastroianni’s order, Section 4.2(b) of the settlement agreement provides the following: “[Defendant] will provide on the plan sponsor website for each fund it makes available a disclosure of the expense ratio for each fund, including the amount, if any, of the SIA management fee or other direct fees specifically associated with each fund. [Defendant] will also disclose for each fund it makes available the revenue paid to [defendant] from a fund, including disclosure of those funds that make no revenue sharing payments to [defendant].”

No violation of prior settlement

According to the participant, MassMutual’s failure to disclose spread violates the language in the second sentence of Section 4.2(b). However, Mastroianni agreed with MassMutual that this language plainly does not require the disclosure of spread with regard to the stable value account.

He concluded that spread is not “paid to” MassMutual “from a fund,” but rather constitutes the earnings MassMutual retains in its general account above the interest rate credited to the stable value account. “Spread, therefore, is not ‘paid to’ defendant from the stable value account but is, instead, the amount not paid to investors from excess earnings in the defendant’s general account. Accordingly, the ‘plain, ordinary, and natural meaning’ of § 4.2(b) does not require the disclosure of spread in this context,” Mastroianni wrote in his order.

He ultimately found that MassMutual did not breach the provisions of the earlier settlement agreement, which barred further claims from class members. Mastroianni ordered the clerk of court to enter judgment for MassMutual and close the case.