PLANADVISER - January/February 2018 - 48

compliance consult
'Principal Protection'
Investments
A look at cases favoring stable value funds
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
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 investParticipants
argued
that
stable value
funds produced
a higher rate of
return than did
money market
funds.
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
ment 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.
David Kaleda is a principal in the fiduciary responsibility practice
group at Groom Law Group, Chartered, in Washington, D.C. He has
an extensive background in the financial services sector. His range of
experience includes handling fiduciary matters affecting investment
managers, advisers,
broker/dealers,
insurers, banks and service
providers. He served on the Department of Labor's ERISA Advisory
Council from 2012 through 2014.
48 | planadviser.com january-february 2018
Art by Tim Bower
http://www.planadviser.com
PLANADVISER - January/February 2018

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