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:

  1. 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.
  2. 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.
  3. 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.

Proskauer’s Perspective

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.

Print:
Email this postTweet this postLike this postShare this post on LinkedIn
Photo of Russell Hirschhorn Russell Hirschhorn

Russell L. Hirschhorn, co-head of the ERISA Litigation Group, represents plan fiduciaries, trustees, sponsors and service providers on the full range of ERISA and state law benefit and fiduciary issues. From single plaintiff litigation and arbitration to complex class action litigation, he provides…

Russell L. Hirschhorn, co-head of the ERISA Litigation Group, represents plan fiduciaries, trustees, sponsors and service providers on the full range of ERISA and state law benefit and fiduciary issues. From single plaintiff litigation and arbitration to complex class action litigation, he provides practical guidance, develops unique litigation defense strategies and, when appropriate, mediates successful resolutions.

Russell represents clients across a wide array of publicly-held, multi-national companies and privately owned companies across a multitude of industries including, banking, finance and investments, pharmaceuticals, retail products and construction, to name just a few. In addition, he also counsels benefit plan clients on a host of compliance and federal and state government agency enforcement matters, including complex and lengthy investigations and audits by the U.S. Departments of Justice and Labor.

Russell is management co-chair of the American Bar Association Employee Benefits Committee as well as management co-chair of the Trial Institutes Committee of the American Bar Association’s Labor and Employment Law. He also writes on cutting-edge ERISA litigation issues, serving as a contributing author and a past chapter editor to Employee Benefits Law (BNA Third Edition).

Deeply dedicated to pro bono work, Russell was a principal drafter of several amicus briefs for the Innocence Project, a legal non-profit committed to exonerating wrongly convicted people. Russell has been recognized on several occasions for his commitment to pro bono work including by President George W. Bush in receiving the U.S. President’s Volunteer Service Award.

Photo of Seth Safra Seth Safra

Seth J. Safra is chair of Proskauer’s Employee Benefits & Executive Compensation Group. Described by clients as “extremely knowledgeable, practical, and strategic,” Seth advises clients on compensation and benefit programs.

Seth’s experience covers a broad range of retirement plan designs, from traditional defined…

Seth J. Safra is chair of Proskauer’s Employee Benefits & Executive Compensation Group. Described by clients as “extremely knowledgeable, practical, and strategic,” Seth advises clients on compensation and benefit programs.

Seth’s experience covers a broad range of retirement plan designs, from traditional defined benefit to cash balance and floor-offset arrangements, ESOPs and 401(k) plans—often coordinating qualified and non-qualified arrangements. He also advises tax-exempt and governmental employers on 403(b) and 457 arrangements, as well as innovative new plan designs; and he advises on ERISA compliance for investments.

On the health and welfare side, Seth helps employers provide benefits that are cost-effective and competitive. He advises on plan design, including consumer-driven health plans with HSAs, retiree medical, fringe benefits, and severance programs, ERISA preemption, and tax and other compliance issues, such as nondiscrimination and cafeteria plan rules.

Seth also advises for-profit and non-profit employers, compensation committees, and boards on executive employment, deferred compensation, change in control, and equity and other incentive arrangements. In addition, he advises on compensation and benefits in corporate transactions.

Seth represents clients before the Department of Labor, IRS and other government agencies.

Seth has been recognized by Chambers USA, The Legal 500, Best Lawyers, Law360, Human Resource Executive, Lawdragon and Super Lawyers.