Money market funds are feeling the heat following a string of recent 401(k) suits targeting the funds' low investment returns.
Since December, at least three lawsuits have been filed alleging that respective 401(k) plan fiduciaries breached their duty under the Employee Retirement Income Security Act of 1974 by retaining money market funds as an investment option rather than stable value funds.
Plaintiffs claim stable value funds, another type of capital-preservation investment option, were the prudent choice given their higher returns.
The trio of suits involve the multibillion-dollar retirement plans of Insperity Inc., Anthem Inc. and Chevron Corp., the latter being the most recent, filed Feb. 17 in a California district court. They come amid a flurry of new 401(k) suits filed recently, as more attorneys join the fray in light of high-profile settlements reached over the last few years.
“I'm not surprised to see claims related to money market and stable value in light of the kind of returns we've had for the last eight years,” said Thomas Clark Jr., an ERISA attorney at The Wagner Law Group. “Every fiduciary in the country is grasping at straws” in the offer of capital preservation funds due to the prolonged low-interest-rate environment, he said.
The Anthem 401(k) plan, for example, offered the Vanguard Prime Money Market Fund as its sole capital preservation fund, which returned 6 basis points at its highest over 2010 to 2014, according to the court filing. The Insperity plan's fund earned only 1 basis point over the same time period.
“You could have had your money under the mattress that whole time,” according to Jerry Schlichter, managing partner at Schlichter Bogard & Denton, who represents plaintiffs in the three suits. “Inflation is greatly exceeding the amount of that return, which we allege is microscopically low.”
Over 2010 to 2014, stable value funds had an average annualized return of 2.32%, as determined by the Hueler Index, a stable-value index, according to the Anthem complaint.
Stable value funds are pooled accounts of bonds and other fixed-income investments that use insurance contracts to provide a specified rate of return over periods of time. In light of the guaranteed, higher returns when compared to money market funds, plaintiffs allege prudent fiduciaries would have considered using stable value funds instead.
Around 63% of 401(k) plans use a stable value fund, and 47% use a money market fund, according to the Plan Sponsor Council of America.
“The lawsuits seem to be taking on the trend that unless you pick the best performer, you've been imprudent, and that's simply just not how ERISA is written,” according to David Levine, principal at Groom Law Group. Rather, ERISA requires a prudent fiduciary process in selecting investment options and a diversified range of investment offerings, he said.
In these cases, plaintiffs are effectively saying fiduciaries should have known money market funds wouldn't perform as well as stable value funds over the specified time period, according to Mr. Levine.
“To me this is the rise of 20-20 hindsight,” Mr. Levine said.
Given historical returns of stable value and money market funds, however, fiduciaries should have been able to foresee money funds would continue delivering “abysmal” returns, Mr. Schlichter contends.
Ultimately, a fiduciary's process for supporting one over the other can weigh on a number of factors, such as the needs of the plan and participants and cost relative to value, according to Jason Roberts, chief executive at the Pension Resource Institute. Also, even though stable value funds typically outperform money market funds, fiduciaries may find stable value overly complex due to the need to understand and vet additional layers such as the guarantees involved, he said.
Some also consider stable value funds to be riskier than money market funds, and the funds may contain restrictions of transfers and withdrawals. A suit filed by a separate firm in December — Ellis et al v. Fidelity Management Trust Co. — alleges Fidelity Investments mismanaged a stable value fund by holding large amounts of the portfolio in securitized debt prior to 2009.
The Schlichter suits are “overreaching so much that I think it's counterproductive for the industry,” Mr. Roberts said.
Mr. Schlichter levied similar arguments in the now-landmark Tibble v. Edison case, which was heard by the Supreme Court. (The high court didn't tackle those specific allegations.) A district court ruled in favor of the defendants, saying that the fiduciaries considered using stable value, but decided in favor of a money market fund because it would “provide more consistent returns and have lower risk.” An appellate court upheld that ruling.
The dismissal of the claim is important in the context of the new suits because it could establish precedence for the courts to again throw out the allegations, according to Mr. Roberts. But Mr. Schlichter disagrees.
“In the Tibble case, the courts concluded there was full comparison [by fiduciaries] of money market funds to a stable value fund,” Mr. Schlichter said. “It's our contention that such a process was not followed in these cases.”