CVS Workers Lose Appeal Over Stable Value Fund

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By Jacklyn Wille

CVS Health Corp. didn’t violate federal benefits law by including in its 401(k) plan a stable value fund that workers said was too conservative, a federal appeals court ruled.

The workers failed to show how the decision to invest up to 55 percent of the stable value fund in cash was imprudent under the Employee Retirement Income Security Act, the U.S. Court of Appeals for the First Circuit ruled March 23. The workers pointed to industry surveys suggesting the CVS fund was a “severe outlier” among other stable value funds in terms of asset allocation, but the court said this wasn’t enough to state a valid claim of imprudent decision making.

The decision is another victory for a financial industry that’s been targeted by several ERISA lawsuits over the management of stable value funds, which are meant to be conservative, low-risk options that protect against interest rate volatility. In February, the First Circuit ruled that Fidelity didn’t act improperly by choosing a conservative investment strategy for its stable value fund that investors said was meant to appease the company’s insurers. Investors agreed to drop a similar case against a subsidiary of Principal Life after a magistrate judge said the case wasn’t viable. Another case is pending against MassMutual.

By contrast, JPMorgan recently agreed to pay $75 million to settle a lawsuit accusing it of adopting an overly risk investment strategy for its stable value fund.

This victory for CVS is also a victory for the U.S. Chamber of Commerce and the Securities Industry and Financial Markets Association, both of which filed briefs urging the First Circuit to reject this “hindsight” challenge to investment strategy.

Survey Not Enough

The First Circuit said the survey data relied on by the CVS investors showed there were many stable value funds on the market and they varied widely in terms of investment strategy. That CVS’s fund had a more cash-heavy allocation than its peers wasn’t enough to state a violation of ERISA, the First Circuit said.

The investors “failed to offer a theory for determining, based on the underlying financial logic of stable value funds, how much liquidity is ‘too much,’ such that imprudence may be reasonably inferred,” the court said.

The decision was written by Judge David J. Barron and joined by Judges Juan R. Torruella and William J. Kayatta Jr. It affirms a 2017 ruling by a district judge in Rhode Island.

Schneider Wallace Cottrell Konecky Wotkyns LLP represented the investors. O’Melveny & Myers LLP, Whelan Corrente Flanders Kinder & Siket LLP, and Sidley Austin LLP represented CVS.

The case is Barchock v. CVS Health Corp., 2018 BL 101526, 1st Cir., No. 17-1515, affirming dismissal of complaint 3/23/18.

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