Judge Rejects Class Action in Stable Value Suit

A stable value fund provider has managed to stave off a potential class action alleging that it earned undisclosed profits from its guaranteed investment offerings.

The suit, Wood v. Prudential Ret. Ins. & Annuity Co. (2017 BL 273021, D. Conn., No. 3:15-cv-1785-VLB, 8/4/17), was brought in the U.S. District Court for the District of Connecticut by 401(k) participants who claimed that Prudential earned $300 million in undisclosed profits from its guaranteed investment products.

It was brought on behalf of Leonard D. Wood II and “all other similarly-situated ERISA-covered Employee Pension Benefit Plans” on behalf of EXCO Resources, Inc. 401(k) Plan, as well as Maya Shaw and “all other similarly-situated ERISA-covered Employee Pension Benefit Plans” on behalf of KeHe Distributors Inc. 401(k) Retirement Savings Non-Union Plan, seeking certification as a class “all ERISA-covered employee benefit plans whose plan assets were invested in Prudential Retirement Insurance and Annuity Company’s Guaranteed Income Fund (GIF) and/or Principal Preservation Separate Account (PPSA) on or after December 3, 2009.”

Allegations

As has been alleged in similar cases, the plaintiffs alleged that the defendants set the crediting rate on these investments “well below its internal rate of return … on the invested capital it holds” through the GIF and PPSA and therefore “guarantees a substantial profit for itself.” Moreover, they alleged that Prudential “…calculates, but does not disclose to its retirement plan clients and their participants the difference between the crediting rate and its internal rate of return,” and that in so doing “collects tens of millions of dollars annually in undisclosed compensation from the retirement plans in violation of its fiduciary duties under Section 502 of the Employee Retirement Income Security Act.”

However, in considering the petition, Judge Vanessa Bryant refused to certify the class because “Plaintiff’s proposed class is too diverse to permit resolution by indivisible injunction. The Court will not be able to calculate, for the entire class, the total amount of Defendant’s improper profits … without first considering each plan’s reasons for offering the GIF as an investment option, the substance of each plan’s negotiations with PRIAC, and what a reasonable guaranteed minimum for each plan would be under these circumstances” since the plans varied in their treatment of crediting rates, investment expenses, spread income, and termination and withdrawal policies.

Judge Bryant also held that the plaintiff might not properly represent the interests of the retirement plans that contracted with Prudential since plans and plan participants have different motivations in selecting investments – motivations that could be adverse in some instances.

In similar actions in different venues, Principal and Great-West have had suits challenging their stable value practices certified as class actions. Similar suits have also been filed against New York LifeMassMutual, Mutual of Omaha and Voya.

The court had previously denied Prudential’s request to dismiss the case.

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