Among the many claims brought by plaintiffs challenging investment offerings in defined contribution plans is the claim that plans should offer stable value funds in lieu of more conservative capital preservation funds, such as money market funds and deposit accounts that are insured by the U.S. government. Plaintiffs have argued that stable value funds are inherently better than more conservative options because they typically provide a higher rate of return.
A federal district court in Texas recently dismissed this type of claim in a case brought against American Airlines. Ortiz v. Am. Airlines, Inc., No. 16-cv-151, 2020 WL 4504385 (N.D. Tex. Aug. 5, 2020). In this particular case, the American Airlines 401(k) plan offered a credit union fund, which was sponsored and managed by American Airlines Credit Union (“AA Credit Union”), and was fully guaranteed by the U.S. government up to $250,000. Two plan participants argued, among other things, that American Airlines and the plan’s investment committee breached their fiduciary duties of loyalty and prudence, and violated ERISA’s prohibited transaction rules, by selecting and retaining this fund instead of a stable value fund. Their claims were based on the higher rate of interest available from stable value funds, without regard to the investment risk presented by stable value funds relative to the credit union fund or the fact that stable value funds would not have had the government guarantee. The plan participants also brought claims against AA Credit Union, arguing that it breached its fiduciary duties by improperly benefitting from the allegedly unreasonable rate of return for the credit union fund.
Although the Court denied an initial motion to dismiss these claims, it subsequently granted defendants’ motion for summary judgment following discovery. Specifically the court held that:
- Since stable value funds carry more risk than a guaranteed deposit fund, the two products “are not simply interchangeable.” Accordingly, a difference in expected return is not sufficient to establish that choosing the more conservative fund was imprudent.
- To establish a breach of fiduciary duty, plaintiffs were required to show that no reasonable fiduciary would have included the credit union fund in the plan. In light of the differences between stable value and a guaranteed deposit fund—particularly the risk profile—the plaintiffs failed to meet this burden.
- To establish a breach of fiduciary duty, plaintiffs needed to provide a more meaningful benchmark fund, g., other demand deposit account funds, from which the court could evaluate the decision to retain the Credit Union Fund despite interest rates that plaintiffs claimed were “abysmally low.”
The court also dismissed the claims against the AA Credit Union. First, it rejected the argument that AA Credit Union became a functional fiduciary simply by accepting and holding deposits into the credit union fund. Second, the court held that plaintiffs’ failed to show that AA Credit Union dealt with plan assets for its own interest by reinvesting some of the credit union fund’s deposits through loans to AA Credit Union customers as this is standard practice for financial institutions and at all times the amounts deposited in the credit union fund were available for withdrawal.
Although the court addressed the merits of all of the claims, it had initially concluded that plaintiffs did not have constitutional standing to pursue their claim that defendants breached their fiduciary duties by failing to include a stable value fund in lieu of the credit union fund. In so holding, the court explained that the harm derived from the failure to offer a stable value fund would be speculative at best because: (i) plaintiffs offered no evidence that they would have chosen a stable value fund had one been provided; and (ii) when a stable value fund option did become available in the plan neither participant took steps to invest in the fund.
The court’s decision in Ortiz v. American Airlines is notable for the court’s willingness to look past allegations that focused solely on interest rates and to dig deeper into fund characteristics that can make it prudent to select and hold a fund with a lower expected return. Particularly where the fund’s purpose is to preserve capital—and not to achieve long-term returns—a prudent fiduciary might favor the protection of conservative underlying investments and/or a government guarantee over a higher interest rate. The decision also reinforces a trend in the courts requiring plaintiffs to provide meaningful benchmarks in support of claims of imprudence.