CVS Wins Dismissal of Stable Value Fund Suit by 1st Circuit

The 1st U.S. Circuit Court of Appeals has affirmed dismissal of a lawsuit that alleged the Employee Stock Ownership Plan (ESOP) of CVS Health Corporation and Affiliated Companies invested in a stable value fund that was “excessively concentrated in investments with ultra-short durations, and maintained excessive liquidity far beyond any reasonable need for it.”

The plaintiffs in the case argued that they received significantly lower crediting rates “than they would have received had the stable value fund been prudently managed in accordance with industry standards regarding duration and liquidity.”

The case was previously dismissed by the US. District Court for the District of Rhode Island, which said the complaint includes no allegations from which it could be inferred that Galliard, the manager of the stable value fund, failed to adhere to the plan’s guidelines and investment objectives. Nor do the plaintiffs assert that Galliard assessed unreasonable or excessive fees or that it materially deviated from the disclosures in the plan documents. Instead, the newly asserted facts in the most recently amended complaint focus primarily on the extent and duration of the fund’s investment in cash or cash-equivalent assets, as compared to industry averages, and are intended to permit an inference that Galliard’s conduct was inconsistent with its duty of prudence. The District Court concluded the complaint was making an impermissible “hindsight” critique of Galliard’s management of the fund.

On appeal, the plaintiffs insist their imprudence claim against Galliard is “not based on mere hindsight criticism” of its investment strategy. In pressing this contention, the plaintiffs appear to be asserting that, with respect to the Employee Retirement Income Security Act’s (ERISA)’s requirement that a fiduciary exercise the prudence that “a prudent man” would use “in the conduct of an enterprise of a like character and with like aims,” the management of a fund labeled as a stable value fund constitutes the relevant “enterprise” of comparison.  From that implicit premise, the plaintiffs then contend that Galliard—by allocating 25% to 27% of the CVS stable value fund’s assets to an investment fund primarily holding short-term, cash-equivalent investments—“departed radically” from the investment standards and logic the plaintiffs insist their imprudence claim against Galliard is “not based on mere hindsight criticism” of its investment strategy.

Appellate court findings

Given what the plaintiffs contend was then-prevailing stable value management practice and logic, Galliard was imprudent in managing the CVS stable value fund, despite meeting the fund’s stated investment objective of outperforming money market funds, solely because the CVS fund was managed “too much” like a money market fund.

The 1st Circuit noted that it just recently rejected a claim that an ERISA fiduciary imprudently managed a stable value fund by, among other things, establishing too conservative of a benchmark (despite disclosing and then exceeding that benchmark) and not investing in higher-risk, higher-return instruments in Ellis v. Fidelity Mgmt. Tr. Co. In doing so, it indicated that conservativism in the management of a stable value fund—when consistent with the fund’s objectives disclosed to the plan participants—is no vice.

But, the plaintiffs contend that out-of-circuit precedent supports their position. However, the appellate court found that none of the cases on which the plaintiffs rely passed on the question presented here: whether allegations that a stable value fund invested a relatively high proportion of its assets in cash or cash-equivalents, and that such a “cash” allocation departed radically from the logic and practices of such funds suffice in combination to state a claim of imprudence under ERISA.

The complaint instead relies on the extent to which Galliard’s cash-equivalent allocations deviated from allocation averages in the stable value industry as well as from what the plaintiffs contend is the inherent logic of stable value funds. The appellate court noted that a claim resting on such evidence, however, runs into the concern that it recently set forth in Ellis. “For it is hard to see how the fact that a stable value fund was run conservatively indicates that it was being run imprudently, where ‘plaintiffs make no argument that offering more conservative investments (such as money market funds) would constitute an ERISA violation,’” the appellate court wrote in its opinion.

The plaintiffs emphasize the data contained in an industry survey that their complaint incorporates.  But, that survey sets forth the arithmetic mean of cash-equivalent allocations by all of the stable value funds participating in the survey for each year. The survey incorporated by the complaint indicates that the cash-equivalent allocations in the surveyed funds ranged widely—from 0.3% to 36.5% in 2011, and from 0.44% to 48.2% in 2012. And the complaint alleges that the CVS stable value fund’s allocation to a fund primarily invested in cash-equivalents was 44% in 2011 and 48% in 2012. “That means, with respect to the two years for which the survey provides data, that the CVS stable value fund’s cash-equivalent allocation was potentially outside the range of allocations made by the surveyed funds in 2011 but then was necessarily within the range of allocations made by the surveyed funds in 2012. In the absence of any additional context, these survey statistics thus show merely that Galliard charted a relatively more ‘cash’-focused course than most of the funds that were surveyed, while taking the most ‘cash’-focused course in one year but not in the next year. But, consistent with our reasoning in Ellis, we do not see how those facts alone can suffice to support a plausible claim that such decision-making was imprudent,” the 1st Circuit said.