Background:  On August 20, 2019, a Ninth Circuit panel in Dorman v. Schwab, No. 18-15281, reversed the district court’s denial of Schwab’s motion

to compel arbitration and held that Schwab could force the plaintiff to individually arbitrate his fiduciary duty claims challenging the administration of Schwab’s 401(k) plan.  In 2017, plaintiff Michael Dorman filed a putative class action in federal court alleging that Schwab had breached its fiduciary duties under ERISA by adding allegedly poorly performing in-house investment funds to its 401(k) plan investment lineup.  In 2015 – two years before the lawsuit was filed – Schwab had amended its 401(k) plan document to include an arbitration clause stating that “[a]ny claim, dispute, or breach arising out of or in any way related to the Plan” had to be resolved by individual, rather than class or collective, arbitration.  Based on this 2015 plan amendment, Schwab filed a motion in the district court to compel individual arbitration.  The district court denied the motion because it concluded that the plan’s arbitration provision was unenforceable with respect to the plaintiff’s fiduciary duty claims.


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In a case of first impression, a federal district court in the Southern District of Texas has ruled that a former parent company’s stock was not an “employer security” under section 407(d)(1) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).[1] As a result, the ERISA exemption from the duty to diversify and the duty of prudence (to the extent the latter requires diversification) were not available where a plan held former parent company stock in a legacy single-stock fund. Although in this case plaintiff participants’ claims were ultimately dismissed, the decision should be on the radar of fiduciaries of plans holding significant amounts of former employer securities.

As background, in 2012, Phillips 66 Company, Inc. (“Phillips 66”) spun off from ConocoPhillips Corporation (“ConocoPhillips”) and sponsored a new defined contribution plan with an employee stock ownership plan (“ESOP”) component, as had ConocoPhillips. In addition to newly issued Phillips 66 stock, however, Phillips 66’s new plan also held more than 25% of its assets in a frozen ConocoPhillips stock fund that was transferred from the old plan in connection with the Phillips 66 spinoff.

When the value of ConocoPhillips stock held by the Phillips 66 plan dropped, participants sued the plan’s investment committee and its members, along with the plan’s financial administrator, alleging imprudence and failure to diversify plan assets in violation of ERISA. In reply, defendants argued that ConocoPhillips stock was not subject to the duty to diversify, as those shares were “employer securities” when issued; ConocoPhillips was previously the employer of the participants. Therefore, defendants argued, ConocoPhillips stock remained exempt from the duty to diversify despite Phillips 66’s spin-off from the ConocoPhillips controlled group.

The court rejected this aspect of defendants’ argument, holding that stock does not indefinitely retain its character as “employer securities” for purposes of ERISA’s diversification and prudence requirements. Ultimately ruling in favor of defendants, the court held that ERISA’s diversification and prudence requirements were not violated because the plan’s investment lineup overall was diversified, public information on the risks of ConocoPhillips stock was reflected in its market price, and because the claims about procedural imprudence lacked factual support in the complaint’s allegations. The Schweitzer court also emphasized that participants were free to shift their ConocoPhillips holdings to other investment options under the plan.


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At the table in the kitchen, there were three bowls of porridge.  Goldilocks was hungry.  She tasted the porridge from the first bowl.

“This porridge is too hot!” she exclaimed.

So, she tasted the porridge from the second bowl.

“This porridge is too cold,” she said

So, she tasted the last bowl of porridge.

“Ahhh, this porridge is just right,” she said happily and she ate it all up.

Virtually all companies that offer participant-directed retirement plans permit their participants to elect an income-producing, low risk, liquid fund, such as a money market fund or a stable value fund. A stable value fund, as the name suggests, is a conservative investment option designed to provide stability, as opposed to growth.

Stable value funds have desirable features.  By combining bonds and an investment wrap, participants can achieve bond-like returns without the interest-rate volatility present in bond funds.  But those features do not eliminate the risk of losses, they just delay them. Indeed, a stable value fund with a longer duration is riskier than a fund with a shorter duration.

The stability-enhancing features of a stable value fund mean that, if a stable value fund invests in a bond that defaults, the value of the fund will not take an immediate tumble, but the loss will be amortized over a period of time.  Over the long run, the performance of a stable value fund approaches the performance of the underlying bond portfolio, minus the expenses of maintaining the wrap coverage and administering the fund.

There is, however, no typical stable value fund. According to How to Evaluate Stable Value Funds and Their Managers by Andrew Apostol, “[d]ue to the varying expectations of individual plan sponsors and the range of management techniques used by their stable value managers, there is not a single style or strategy that is common across all stable value funds.” For example, the plans for a Silicon Valley startup or a hedge fund will differ. Even if both aim for stability, the participants likely have different risk targets, which will lead to different markups across stable value funds.

Even though there is no typical stable value fund, there are three typical types of lawsuits filed against fiduciaries offering stable value funds. Fiduciaries have been sued for 1) offering a stable value fund that is too risky and 2) offering a stable value fund that is not risky enough. Only Goldilocks, it seems, could safely offer a stable value fund.

Considering the litigation risks for fiduciaries who do not set the stable value fund just right—a task that always looks easier in the hindsight of a lawsuit—a fiduciary may conclude the best option is not to offer a stable value fund at all. Yet fiduciaries have also been sued for 3) not offering a stable value fund. Let’s take a deeper dive into these three bears of a lawsuit.
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