Financial services firms that cater to the retirement plan market might be excused for thinking there’s a target on their back.
As attorneys from the law firm of Morgan, Lewis & Bockius explained at the 2016 SVIA Spring Seminar, the ERISA plaintiffs’ bar continues to test new theories about ways that service providers, and plan sponsors, have allegedly breached their duties to retirement plan participants.
The cases generally fall into three categories, said Morgan Lewis partner Melissa Hill:
- Lawsuits against providers of stable value funds alleging they did not prudently manage the stable value option.
- Lawsuits against insurance companies that service retirement plans or provide guaranteed benefit options.
- Lawsuits against plan sponsors and fiduciaries alleging that they breached their fiduciary duties by offering retirement plan participants a money market fund rather than a stable value fund.
The cases against stable value providers, and in many cases plan sponsors, are particularly frustrating because the allegations keep shifting. “They used to claim that you were too risky and too aggressive, and therefore there were some losses,” Hill observed. “Now the claim is that you are too conservative and you didn’t achieve the returns we expected. It’s what I call Goldilocks litigation: either it’s too risky or too conservative; never just right.”
In one recent case, Hill said, the plaintiffs allege that Fidelity Management Trust Co., among other things, used an “unduly conservative” investment strategy for the stable value fund offered in the 401(k) plan of bookseller Barnes & Noble. The suit charges that Fidelity made the fund more conservative after the 2008 financial crisis to appease the fund’s wrap providers, at the expense of plan participants. Fidelity filed a motion to dismiss the suit. However, the federal district court judge ruled against Fidelity’s motion to dismiss, which permits the suit to go forward. In a similar lawsuit against Union Bond & Trust Co., Hill said, a court has already dismissed claims of excessive fees, but has allowed claims of imprudent management to proceed.
Hill pointed out that the allegations in the Fidelity case are “exactly the opposite” of those made in an earlier case against JPMorgan Chase. Similarly confounding, she said, is that both cases have employed the testimony of the same expert plaintiffs’ witness.
The implication, Hill said, is that the insurers simply decided how much they wanted to earn and set their crediting rates accordingly. “You scratch the surface, or look at the contracts, and that’s not actually what’s been happening,” she said. She added that “… at a fundamental level [the plaintiffs] just have their facts wrong”—a point she said defendants have been making in their motions to have the suits dismissed.
Plaintiffs’ attorneys have responded to those motions with some creative arguments, Hill conceded, “and with an effort to confuse things for the courts, who may not have seen, or may not be accustomed to seeing, this type of product, or to looking at these types of contract provisions in this level of detail.” She said plaintiffs’ attorneys “have done a decent job of confusing things, at least on paper”.
The insurance-company lawsuits also allege that the insurers violated ERISA’s 408(b)(2) disclosure requirements “by not disclosing the difference between their internal rate of return and the crediting rate.” The argument is that this so-called “spread” constitutes direct or indirect
compensation and so should have been disclosed. The suits also claim the insurers placed transfer restrictions and/or “punitive” financial penalties on their stable value funds, thereby preventing retirement plan customers from moving out of the funds.
“I think when the 408(b)(2) disclosure rules came out, we all thought it was just a matter of time before we would see these issues raised in litigation,” Richman said. “They’re attacking a gray area where we didn’t get any further guidance.”
In another case against an insurance company, Rozo v. Principal Life Insurance Co., the plaintiffs have alleged that a guaranteed investment contract offered by the insurer was not a guaranteed benefit policy exempt from ERISA’s fiduciary rules, and that the insurer’s actions in setting the crediting rate for the GIC violated ERISA. In what Hill called a “very short and not thoroughly reasoned decision,” a court relied on that allegation in denying the defendant’s motion to dismiss the case.
In the wake of lawsuits claiming that stable value providers somehow harmed retirement plan participants, perhaps the most surprising new set of lawsuits are those claiming that fiduciaries should have offered stable value funds to retirement plan participants instead of money market funds. Richman and Hill cited two examples: Bell v. Anthem Inc., and White v. Chevron Corp. The basic argument in both suits is the same: the defendants imprudently offered money market funds with extraordinarily low yields, when higher-yielding stable value funds offering similar principal preservation features were available.
As appealing as those lawsuits might seem to the stable value community, Richman cautioned that “there is some concern about the concept that it’s per se prudent or imprudent” to offer or not offer any one investment product, across the board, in all plans. “Prudence is a high standard, but it’s also intended to be a flexible standard—not to mandate specific investments,” he said.
Asked whether the plaintiffs’ attorneys filing lawsuits against plan service providers might face any ramifications if the suits are found to have been frivolous, Hill called it a great question she gets from many of her clients. Unfortunately, she said, if past practice is any indication, plaintiffs’ lawyers won’t face any consequences.
Hill also was asked what firms might be doing to prepare themselves in the event of a lawsuit. In the case of Goldilocks cases questioning the prudence of a stable value fund’s investment strategy, she said, documenting the process used to arrive at that investment strategy could be helpful in mounting a defense.