By Randy Myers
The plaintiffs’ bar has filed a number of lawsuits over the past few years aimed at the stable value industry. How the industry fares in these cases will go a long way toward determining whether additional lawsuits are likely to follow, according to Mark Blocker, a partner at Sidley Austin LLP.
Speaking at the 2017 SVIA Spring Seminar, Blocker cited three core reasons for the current crop of stable value lawsuits. First, he said, there’s been an increase in retirement plan product litigation as a whole—including lawsuits centered on mutual fund expenses and company stock—and stable value hasn’t been immune to that trend. Second, the stable value industry now accounts for more than $800 billion in assets, representing an eye-popping opportunity to the plaintiffs’ bar. Finally, a 2014 case involving the Lockheed Martin retirement savings plan, which included a claim that the plan’s stable value fund was actually a money market fund, settled for $62 million, of which $37 million was related to the stable value claim. This settlement may serve as encouragement for similar suits from plaintiffs’ attorneys.
The current crop of lawsuits targets three types of stable value products, Blocker said, including pooled stable value funds, single-company stable value funds, and general account products. The same law firm has filed the three pooled-fund and two single-plan lawsuits, he added, while three different firms are involved in the general account cases.
Pooled funds. Three of the current lawsuits target pooled funds, Blocker said, with two claiming the fund didn’t take enough risk and therefore underperformed the average stable value fund. The third suit makes exactly the opposite claim: that the fund took too much risk. All three cases are in discovery, and Blocker said he anticipates decisions in some or all within the next year. Blocker said there have been no settlements in these cases and he doesn’t expect any in the foreseeable future.
Single-company funds. Lawsuits targeting single- company stable value funds typically claim the funds were mismanaged, Blocker said, with the fund manager investing too much in cash or short-term instruments. This was the gist of the Lockheed Martin claim, which, as noted, has settled. A second case recently was dismissed, Blocker said, “and the ruling could not have been better for the stable value fund operator and the industry in general.” The judge ruled that it is the investment process, not investment results, that matter in such claims. She also said the fact that a stable value fund’s returns differ from an industry average means nothing, and that it’s not enough for plaintiffs to use hindsight to claim a fund could have performed better.
General account products. Six lawsuits centered on general account products are moving through the court system right now, Blocker said, and another one has already been dismissed.
The pending cases typically charge that the insurance company managing the stable value product, while not acting as a fiduciary, effectively was a fiduciary and as such should not be able to retain any spread earned on investments in the company’s general account. “Unfortunately, most of these cases have been allowed to proceed,” Blocker said. “The courts have said they need more evidence on the fiduciary status of the defendants, so they haven’t dismissed them at the earliest opportunity as they did with some of the pooled stable value fund cases.”
The general account lawsuit that was dismissed, Blocker said, involved a plaintiff suing over both spread and non-spread products; since the plaintiff only operated a non-spread product, the court prevailed in putting a stop to the suit.
Money market versus stable value funds. Blocker noted that there has been a fourth wave of lawsuits that tangentially impact the stable value industry. These involve claims that retirement plans offered money market funds as investment options when they should have offered stable value funds, which historically have performed better.
The plaintiffs in these cases have argued that prudent fiduciaries would always offer a stable value fund rather than a money market fund because stable value funds have done better over time, generally providing higher returns with minimal additional risk. There are four such cases pending, as well as one proposed settlement involving a plan run by American Airlines. Blocker said courts generally have not been receptive to these claims, ruling in a dismissed case against a Chevron plan that the plan had gone through a thoughtful process in deciding between a money market fund and a stable value fund and that this was sufficient to counter claims of fiduciary imprudence. This was similar to an earlier finding in Tibble v. Edison International.
One similar suit that is following a different narrative, Blocker reported, is the case of Ortiz v. American Airlines, in which the airline offered plan participants an investment option known as the American Airlines Credit Union Demand Deposit Fund—essentially, Blocker said, a money market fund. Early in the case, the parties agreed to settle for approximately $8 million, but the court that had to approve the settlement rejected it, saying the $8 million figure didn’t look to be enough to settle the claim. “What ultimately happens in that case, I can’t predict,” Blocker said.