Plan participants not blocked from suing as class to recover investment losses

Plan participants who had invested in stable value funds (SVFs) offered under the plan could bring suit under ERISA as a class to recover investment losses resulting from the allegedly imprudent investment options, according to the U.S. Court of Appeals in Chicago (CA-7). The class was narrowly limited to participants who had invested in SVF units that had under-performed a designated investment index and thus, was designed to avoid intra-class conflicts.

Stable value funds invested in money market instruments
Participants in 401(k) plans brought suit, alleging that the stable value funds offered by the employer company did not feature a mix of short and intermediate investments, but were heavily invested in short-term money market instruments. As a consequence, participants experienced a low rate of return that did not beat inflation by a sufficient margin to provide meaningful retirement assets. Structuring the SVFs in such a manner, the participants alleged, constituted imprudent management in violation of ERISA.

Class certification
The case centered on the definition of the class to be certified for litigation. In Spano v. Boeing Co., the Seventh Circuit stated that a “class representative in a defined contribution case would at a minimum need to have invested in the same funds as the class members.” In addition, the Seventh Circuit advised that the class must not be “defined so broadly that some members will be actually harmed” by the relief being sought.

The participants’ proposed class included all plan participants and beneficiaries whose accounts held SVF units through the class period and whose SVF units underperformed relative to an index that traced the performance of stable value funds (Hueler FirstSource Universe Index). By narrowing the class definition, the participants looked to exclude individuals who may have benefited from the company’s conduct.

The trial court rejected the class for the SVF claim, ruling that the use of the Hueler Index in the proposed class definition was an improper attempt to use class certification to “back door” a resolution of the contested issue (the proposed measure of loss) in the participants’ favor. The appeals court reversed, explaining that the reference in the proposed class definition to the Hueler Index did not improperly prejudge the merits of the participants’ SVF claim or in any way obligate the trial court to use the Index as a measure of damages. In addition, the court emphasized that class definition is a tool of case management and does not influence the merits of a case.

Note: The court stressed the importance in class certification of ensuring that a significant portion of a class not have interests adverse to that of the class representatives. The class may not be defined so broadly that some members will actually be harmed by the relief. However, the mere possibility that a trivial level of intra-class conflict may materialize as the litigation progresses does not foreclose class certification. In the instant case, there appeared to be no risk that any SVF investor who benefited from the company’s allegedly imprudent management would have plan assets reduced as result of the suit. Accordingly, the proposed SVF class was not invalid.

Source: Abbott v. Lockheed Martin Corp. (CA-7).

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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