Just days after The New York Times reported[i] on the impact of a corporate bankruptcy on 401(k) accounts, litigation has been filed against the plan fiduciaries.
Plaintiffs Paul Harvey and Lela LaPlante (both of whom claim to have lost 10% of their GIA balance) on behalf of the Bed Bath & Beyond, Inc. 401(k) Savings Plan have filed suit pursuant to the Employee Retirement Income Security Act against Defendants Bed Bath & Beyond, Inc. 401(k) Savings Plan Committee, and Laura Crossen (BBB’s Chief Accounting Officer and later its Chief Financial Officer) for having “failed to monitor the prudence of the Plan’s investment in the MassMutual Guaranteed Interest Account (GIA), certified false and misleading statements concerning the risk of loss to Plan participants invested in the GIA and failed to take action to avoid the multi-million-dollar losses that followed.”
According to the suit (Harvey v. Bed Bath & Beyond, Inc. 401(k) Savings Plan Comm., D.N.J., No. 2:23-cv-20376, complaint 9/14/23) filed in the U.S. District Court for the District of New Jersey, “the GIA was the Plan’s investment option intended to preserve Plan participants’ principal balances and provide a fixed rate of return” was “governed by a group annuity contract between the Plan and Massachusetts Mutual Life Insurance Company,” and that “participants were able to move their account balances between the GIA and other Plan investment options at 'contract value,'” which the suit says “preserved the principal balance of Plan assets invested in the GIA, as well as all interest credited to the participants’ accounts under the contract terms.”
This contract could be terminated by the Plan with notice and would “automatically terminate upon the occurrence of specified events, including BBB filing for bankruptcy.” Moreover, the suit alleges that upon termination, the contract value was subject to an adjustment based on the market value of the underlying investments purchased by MassMutual using the assets in GIA. “If the market value of the underlying investments dropped, MassMutual had the right to make up for these losses out of participant accounts upon termination of the contract.” And in this case, “because the GIA’s underlying investments were almost entirely longer-term fixed income securities, the most likely cause of such a decline in market value would be an increase in interest rates, which is generally associated with a drop in the price of the type of securities that backed the GIA,” according to the suit.
BBB filed for bankruptcy on April 23, 2023, triggering termination of the MassMutual contract—AND a market value adjustment, per the above. The suit then notes, “The market value adjustment was substantial and negative, wiping out around 10% of the value of participants’ principal preservation accounts, totaling more than $5 million.” The suit goes on to note that “the high risk of a substantial, negative market value adjustment to participant account balances caused by a BBB bankruptcy was known or should have been known to Defendant Committee in advance and could have been avoided by exercising prudence and care.”
Prescience Not Required
“Defendant Committee was required to monitor the risk of loss to the Plan if BBB’s reinvention campaign failed and the company declared bankruptcy,” the suit alleges. “This did not require prescience regarding the ultimate fate of BBB’s effort to reinvent itself after years of decline; rather, it required a prudent process for investigating risks and alternatives for the Plan.”
The suit further alleges that “a prudent fiduciary would have (1) identified BBB’s escalating risk of bankruptcy after 2018 and the prospect of a severe downward market value adjustment to GIA account balances, (2) investigated whether the Plan could terminate the MassMutual Contract favorably in the near term without a severe downward market value adjustment, and (3) investigated alternatives to the MassMutual Contract for offering Plan participants a principal preservation option that would protect their balances in the event of a future bankruptcy filing by BBB.” Moreover, the suit notes that if the committee had done so, “it would have terminated the MassMutual Contract by notice and avoided the risk of Plan losses that could result from BBB’s bankruptcy and a decrease in value of the GIA’s underlying portfolio.”
Now, while the suit acknowledges that “the company’s high risk of bankruptcy was well known, the exact timing of a potential bankruptcy could not be known by the Committee.” That said, the suit positioned as a choice “between exiting the MassMutual contract at a time when the Committee knew that the market value adjustment would not have a significant adverse impact on participants’ principal preservation accounts or gambling that market conditions would be favorable on the unknown future date that BBB might declare bankruptcy.” The suit says there was plenty of opportunity to do so, but that “the Committee breached its fiduciary duty of prudence by failing to engage in a prudent monitoring process and failing to take action.”
The suit then proceeds to cite several other types of capital preservation options, explaining that “Making such a change would not have required Defendants to commit any kind of insider trading. Though they would be acting to avoid the risks associated with corporate bankruptcy, they would merely be trading in fixed income securities of unaffiliated entities. So, in this setting, acting upon information regarding the company’s financial situation was not only legal, and was not only something Defendants should have been doing, but it was also something that Defendants (falsely) claimed they were doing….”
The suit also alleges that “in October 2020, October 2021, and October 2022, Defendant Crossen certified statements contained in the Plan’s annual reports declaring the company did not believe any event that would subject the GIA to a market value adjustment—including “bankruptcy of the plan sponsor”—was “probable of occurring.”
We’ll see what the court has to say about this.
NOTE: In litigation there are always (at least) two sides to every story. However factual it may turn out to be, the initial lawsuit in any action is only one side, and one generally crafted toward a particular result. In our coverage you'll see descriptions of events qualified with statements such as “the suit says,” or “the plaintiffs allege”—and qualifiers should serve as a reminder of that reality.