Class action lawsuits involving stable value funds appears to have slowed, and for most defendants is beginning to look more like a minor dust up.
The plaintiffs’ bar began filing lawsuits against retirement plans starting in 2006, typically alleging that the plans were paying excessive fees to service providers to the detriment of plan participants. Eventually, plaintiffs’ attorneys began filing suits against plans in connection with their use, or non-use, of stable value funds. Sometimes, they argued that the plans were harming participants by offering money market funds as their principal preservation option rather than higher-yielding stable value funds. Other times, they argued that the stable value fund was managed too conservatively, robbing plan participants of potential earnings, or too aggressively, subjecting participants to too much risk. In still other instances, they contended that insurers providing general account fixed-income stable value products were violating their fiduciary duty by earning a profit on what plaintiffs’ attorneys called the “spread” between a fund’s costs and its crediting rate.
Speaking at the 2018 SVIA Fall Forum, Mark Blocker, a partner with the law firm of Sidley Austin LLP, said that managers of pooled synthetic funds have won most of the cases where they were alleged to have taken too little or too much risk. He said courts generally found that contrary to to plaintiffs’ attorneys, comparisons of crediting rates to an average of like funds, or to returns on insurance company general account products, was not meaningful.
All of those cases have now been resolved, Blocker said. In only one case did the defendant settle. Although the settlement was substantial, he said the specifics around that case were unique, involving the management of assets compromised during the 2007-2009 credit crisis. Accordingly, he said, it would be hard to predict whether it will generate any more lawsuits. “Usually, plaintiffs’ lawyers follow the money,” he said, “but I suspect that is unlikely here.”
Lawsuits involving single-company stable value funds typically revolved around claims that the funds were mismanaged, including, in some cases, that they held too much cash. Blocker said one such case was dismissed, one was settled, and another was affirmed on appeal in a way that will make it difficult to bring similar claims in the future. Court rulings, he said, have indicated that process, not results, matter when setting a fund’s strategy; that deviation from an industry standard means nothing; and that it is not enough for plaintiffs to suggest ways a fund could have performed better using hindsight.
Blocker said his firm has been involved in eight cases involving general account products over the past four years, and seven of those were lost by the plaintiffs, with nothing paid out in settlements. The remaining case that is still pending is in district court, and, he said, he’s hoping for a ruling on that one soon.
The one type of lawsuit where it’s not yet clear how retirement plans will fare, Blocker said, captures cases arguing that the plan sponsor should have offered only a stable value fund, or a stable value fund along with a money market fund, to plan participants. So far, he said, one such case has been won by the plaintiffs, although it is now on appeal; another has resulted in a settlement; one has gone through the trial process and is awaiting a decision; and many others are pending.
The case that was settled, involving an American Airlines plan, was interesting, Blocker said, because the judge was asked to approve the settlement amount. The court ,refused to do so. The judge argued that the settlement amount—$8.8 million—was too low because plan participants may have lost out on as much as $88 million in expected returns. That case is now back on the litigation track. Blocker explained the settlement, by historical standards, would not have been unusually low. “It is not unusual for settlements to be in that range; 10 percent of the totality is not an uncommon amount. Judges generally won’t flinch at that; a lot of times they will not flinch at an even smaller amount.”
No matter what happens with the remaining cases around plans not offering stable value funds, Blocker said, there may be a positive boost to the industry as a whole. If the cases are decided in favor of the plaintiffs, he explained, it could simply lead to more plans offering stable value funds.