Stable Value Suit Strikes Out a Second Time

A plan fiduciary prevailed for a second time against claims that its stable value fund was imprudently structured and monitored.

In the case, brought by participants in CVS’ plan (Barchock v. CVS Health Corp., D.R.I., No. 1:16-cv-00061-ML-PAS, report and recommendation 1/31/17), the plan participant-plaintiffs allege that fund manager Galliard failed to exercise appropriate prudence with respect to the investment allocation in the Stable Value Fund, one of the investment options in the CVS plan, and that CVS failed in its duty to monitor Galliard’s investment management.

The plaintiffs’ first pleading (in the words of Judge Sullivan) offered “…nothing from which to conclude that the Stable Value Fund’s short-term fixed income holdings were unreasonable in view of all the considerations a prudent fiduciary might have found relevant, much less that the Fund’s fiduciaries failed to use appropriate methods to investigate and make those investment allocation decisions.”

The plaintiffs objected, made a motion to amend their complaint, and were allowed to do so.

Second ‘Helping’

“With this fleet of facts, navigating with far more precision than before,” according to Judge Sullivan, the plaintiffs allege inference of a breach of the duty of prudent management that they say arises from an examination of three aspects of the CVS Stable Value Fund’s asset allocation. They make those arguments with a complaint “…now loaded to the scuppers with factual allegations in support of each,” according to Judge Sullivan. While she noted that the new pleading is more effective at tamping down the inference of prudence (as opposed to imprudence) that the initial pleading reflected.

In this version the plaintiff argues that there was excessive liquidity in the fund’s asset allocation and that the too-brief duration of the investments caused by an excessive percentage invested in short-term TIFs resulted in suppressed returns. This excessive allocation to cash equivalents defeated the essential characteristic of a stable value fund, which is supposed to be an investment that generally outperforms money market funds while delivering lower volatility.

Plaintiffs allege that during the years 2010 through 2013, between 27% and 55% of the CVS Stable Value Fund’s assets were invested in what they said amounts to a highly-liquid, short-term, cash-equivalent money market fund, similar to a “token-interest checking account.” That part of the fund during the period in question had “negligible returns, from a high of 0.28% in 2010 to a low of 0.17% in 2013,” during a period when the portion of the stable value fund invested there ranged from 55% of that fund in 2010, down to 44% in 2011, back up to 48% in 2012, and down to 27% in 2013. The balance of the CVS Stable Value Fund was invested in intermediate-term investments that typically returned 5% or more.

But, Judge Sullivan noted, “Rather, and somewhat illogically, it focuses on the performance of the “other assets of the CVS Stable Value Fund,” and concludes that, if the whole had been invested in the same intermediate-term assets as the portion dedicated to longer-term insurance contracts, the Fund’s performance would have exceeded the actual performance in 2010 by 2.4%, in 2011 by 1.4%, in 2012 by 1% and in 2013 by 0.4%.” What did Sullivan make of this? “This approach makes no sense,” she wrote.

More Ballast?

However, in the current review, Judge Sullivan noted that, “While this Complaint contains far more ballast than its predecessor, I find that the new material adds little more than substantial factual support for the allegation found to be legally insufficient in the first go-round – that hindsight reveals that the Fund’s allocation did not maximize returns.” And, while she acknowledged that the new claims – that the fund’s asset allocation, the duration of the fund’s investments and the fund’s performance deviated from industry averages — “…rest firmly on a substantial factual foundation,” she found that they were “insufficient to permit an inference of imprudence.”

And because the allegations against Galliard were insufficient, allegations that CVS allegedly breached its duty to select and monitor Galliard must also fail, Sullivan concluded.

“At bottom, Plaintiff’s amended pleading is laden with facts that plausibly buttress their core claim that, with the prescience of a crystal ball’s forecast of the future, the CVS Stable Value Fund managers could have delivered better returns for the investors.” However, Sullivan noted, “That does not state a claim.”

As for the second count of the complaint, that CVS failed to exercise its duty as a fiduciary to select and monitor its investment manager, Galliard, Judge Sullivan noted that “because a monitoring fiduciary does “not fail in the discharge of its duty to select and monitor” if the investment manager “did not commit a breach,” that “with no plausible allegation that Galliard committed a breach of its duty as investment manager, Count II also fails to state a claim.”

And, when all was said and done, Judge Sullivan concluded: “…Plaintiffs have failed again to sustain their threshold burden of putting forward plausible allegations sufficient to raise an inference that Defendants breached any duty owed to Plaintiffs.”

Add Your Comments

One Comment

  1. Chris Tobe
    Posted February 3, 2017 at 8:16 pm | Permalink

    I believe many of the stable fund cases have validity but this one appears to be off.

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