Fidelity Defeats Class Action Over Stable Value Fund

Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...

By Jacklyn Wille

Fidelity Management Trust Co. is free of a class action by 401(k) investors who said the company’s stable value fund carried excessive fees and used an unduly conservative investment strategy ( Ellis v. Fid. Mgmt. Tr. Co. , 2017 BL 208738, D. Mass., No. 1:15-cv-14128-WGY, 6/19/17 ).

A federal judge ruled on June 19 that the investors failed to show Fidelity breached its duties of loyalty or prudence in administering the stable value fund. The participants accused Fidelity of responding to the 2008 financial crisis by adopting an overly conservative investment strategy meant to appease the fund’s “wrap providers”—companies like American General Life, JP Morgan, and Prudential that provide additional insurance on the stable value investment—at the expense of those investing in one of Fidelity’s stable value funds. Fidelity then attempted to conceal these missteps by reporting a misleading benchmark that made the fund look more competitive than it actually was, the complaint alleged.

Stable value funds—which are meant to be conservative, low-risk options that protect against interest rate volatility—have become a flash point in litigation under the Employee Retirement Income Security Act. Retirement plan sponsors including Anthem Inc., Chevron Corp., and Insperity Inc. have been sued for failing to include stable value funds in their investment lineups. None of those complaints succeeded.

Other lawsuits target companies like Fidelity that offer and manage stable value funds, with cases pending against Massachusetts Mutual Life Insurance Co. and Prudential Retirement Insurance & Annuity Co. CVS Health Corp. recently escaped a lawsuit over its stable value practices, and a magistrate judge last month recommended dismissing a similar lawsuit against a subsidiary of Principal Financial Group Inc.

In this case, Judge William G. Young of the U.S. District Court for the District of Massachusetts found that Fidelity didn’t breach its ERISA-imposed duty of loyalty in its dealings with wrap providers. Young said it was reasonable for Fidelity to seek insurance from multiple wrap providers and to agree to the terms those providers imposed, even if the investors later challenged those terms as overly stringent.

The investors also failed to convince Young that Fidelity breached its duty of prudence. They argued that Fidelity measured the fund against an unduly conservative benchmark so that portfolio managers could more easily receive bonuses, but Young disagreed, saying Fidelity’s benchmark analysis process “appears procedurally prudent.”

Finally, Young appeared to distinguish his ruling from a recent decision upholding CVS Health’s stable value practices. The judge who dismissed that case called it an impermissible hindsight attack on an investment strategy that wasn’t objectively imprudent. Here, Fidelity also argued that the lawsuit against it was impermissibly based on hindsight. Young said only that he “disagrees with this characterization” and declined to address it further.

The investors were represented by Zelle LLP, Schneider Wallace Cottrell Konecky Wotkyns LLP, and Righetti Glugoski PC. Fidelity was represented by Goodwin Procter LLP and O’Melveny & Myers LLP.

To contact the reporter on this story: Jacklyn Wille in Washington at jwille@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Try Pension & Benefits Daily