‘Principal Protection’ Investments
Art by Tim Bower
A recent spate of cases alleging breach of fiduciary duty under the Employee Retirement Income Security Act (ERISA) connected to stable value funds, money market funds and other “principal protection” investment options raises fiduciary compliance questions for plan fiduciaries and advisers. In light of these cases, many fiduciaries may view themselves in one of those “damned if you do, damned if you don’t” type of situations when selecting a principal protection investment option or investing the assets of such an option. Plan fiduciaries and advisers should have an understanding of these lawsuits and consider what actions should be taken to meet ERISA’s fiduciary duty requirements and mitigate the risk of fiduciary liability.
In a number of cases, the plan sponsor or other named fiduciary tasked with choosing investment options has been sued for breach of fiduciary duty by plan participants. In each, the participants argued that stable value funds produced a higher rate of return (ROR) than did money market funds. Thus, a stable value fund should have been made available as an investment option under the plan—and, possibly, in lieu of a money market fund or other option with a lower ROR.
In White v. Chevron Corp., the plaintiffs alleged that the plan’s fiduciary breached its duty of prudence by offering only a money market fund as a principal protection investment option, when a stable value fund would have generated a higher rate of return. The district court rejected this claim, finding that the plan’s investment guidelines required only that the plan include “‘[a]t least one fund to provide for a high degree of safety and capital preservation.’” Further, the court found that the plaintiffs only compared the relative performance of stable value funds to money market funds and failed to allege that the fiduciary engaged in a failed process whereby the money market fund was selected instead of a stable value fund.
Similar claims were raised in Bell v. Pension Committee of ATH Holding Co. The court dismissed the participants’ complaint because their allegation of imprudence was based merely upon a bald-face assertion that stable value funds are better than money market funds because they generate higher returns. The court implies that there is not necessarily an obligation to consider a stable value fund at all.
Plan participants in another series of cases argue that the stable value fund was imprudently managed so that the rates of return were too low. In Barchock v. CVS Health Corp., the participants sued the plan sponsor, benefits committee and stable value fund manager for imprudent investment of the fund’s assets. The fund’s manager invested the stable value fund’s assets in another fund, the assets of which were, according to the participants, mostly cash and cash equivalents. Thus, the manager breached its fiduciary duty to prudently invest the fund’s assets, and the plan sponsor and committee breached their duties of prudence for allowing the fund to remain an investment option. The court dismissed the complaint because there was no allegation that the manager violated the fund’s investment guidelines.
Moreover, another court, in Ellis v. Fidelity Management Trust Co., rejected plaintiffs’ claims that Fidelity imprudently invested the assets of a stable value fund too conservatively and it thus underperformed peer funds.
Insurance company issuers of principal protection-type insurance products have also been the subject of ERISA lawsuits. Some insurance companies issue a contract pursuant to which is guaranteed the principal of plan contributions paid to the insurer and an agreed upon rate of interest that the insurer may reset on a periodic basis. In Insinga v. United of Omaha Life Insurance Co., the participants argued that the insurance company was able to control the compensation it received by adjusting its crediting rate because the insurer retained the spread between the return on its investment of general account assets and the amounts owed under the contract. The district court concluded that the insurance company was not a fiduciary for purposes of ERISA when it exercised its contractual right to reset its crediting rate.
Clearly, the investment of plan assets in principal protection investment options has been the focus of plaintiffs’ attorneys.