The State of Stable Value Fund Litigation

Fiduciaries have been sued for offering a stable value fund that is too risky, not risky enough – and for not offering one at all. Only Goldilocks, it seems, could safely offer a stable value fund:

At the table in the kitchen, there were three bowls of porridge. Goldilocks was hungry. She tasted the porridge from the first bowl.
“This porridge is too hot!” she exclaimed.
So, she tasted the porridge from the second bowl.
“This porridge is too cold,” she said.
So, she tasted the last bowl of porridge.
“Ahhh, this porridge is just right,” she said happily and she ate it all up.

Virtually all companies that offer participant-directed retirement plans permit their participants to elect an income-producing, low risk, liquid fund, such as a money market fund or a stable value fund. A stable value fund, as the name suggests, is a conservative investment option designed to provide stability, as opposed to growth.

Stable value funds have desirable features. By combining bonds and an investment wrap, participants can achieve bond-like returns without the interest-rate volatility present in bond funds. But those features do not eliminate the risk of losses, they just delay them. Indeed, a stable value fund with a longer duration is riskier than a fund with a shorter duration.

The stability-enhancing features of a stable value fund mean that, if a stable value fund invests in a bond that defaults, the value of the fund will not take an immediate tumble, but the loss will be amortized over a period of time. Over the long run, the performance of a stable value fund approaches the performance of the underlying bond portfolio, minus the expenses of maintaining the wrap coverage and administering the fund.

There is, however, no typical stable value fund. According to How to Evaluate Stable Value Funds and Their Managers by Andrew Apostol, “[d]ue to the varying expectations of individual plan sponsors and the range of management techniques used by their stable value managers, there is not a single style or strategy that is common across all stable value funds.” For example, the plans for a Silicon Valley startup or a hedge fund will differ. Even if both aim for stability, the participants likely have different risk targets, which will lead to different markups across stable value funds.

Even though there is no typical stable value fund, there are three typical types of lawsuits filed against fiduciaries offering stable value funds. Fiduciaries have been sued for (1) offering a stable value fund that is too risky; and (2) offering a stable value fund that is not risky enough. Only Goldilocks, it seems, could safely offer a stable value fund.

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 fiduciaries have also been sued for (3) not offering a stable value fund. Let’s take a deeper dive into these three bears of a lawsuit.

1. Too Risky

In In re JPMorgan Stable Value Fund ERISA Litig. (S.D.N.Y., No. 1:12-cv-02548-VSB), the plaintiffs sued JP Morgan Chase, arguing that the stable value fund invested in risky, highly leveraged assets – especially mortgage-related assets like mortgage-back securities. The district court later 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

2. Not Risky Enough

So far, plaintiffs have not yet succeeded with this claim. 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. In Barchock v. CVS Health Corp. (No. CV 16-061-ML, 2017 WL 1382517, at *5 (D.R.I. Apr. 18, 2017), 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. What matters is if the risk of the investment matches the CVS plan’s investment objectives. Many of these same considerations will be at issue in Ellis v. Fidelity Management Trust Co., No. 17-1693 (1st Cir. 2018) and Barchock v. CVS Health Corp., No. 17-1515 (1st Cir. 2018), when an appellate court addresses an ERISA challenge to stable value funds for the first time.

3. Failing to Offer a Stable Value Fund

Plaintiffs have unsuccessfully sued Chevron, Anthem and Insperity for failing to include stable value funds in their plans’ investment lineup. In White v. Chevron Corp. (2016 BL 281396, N.D. Cal., No. 4:16-cv-00793-PJH, 8/29/16),  the fiduciary included a money market fund instead of a stable value fund. 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.

So it seems whatever a plan sponsor decides to do with a stable value fund, there is a risk of costly litigation. Despite some early successes in these cases, 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. If offering a stable value fund fits with a plan’s investment goals, then plan sponsors and fiduciaries must be careful in setting the fund’s level of risk.

In fairy tales it may be possible to get it “just right,” but, at least in a world with plaintiffs, until more courts ring the death knell for such claims, stable value funds remain fodder for litigation.

Nancy G. Ross is a partner at Mayer Brown LLP in Chicago.

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