Stable Value Suit Survives Second Salvo
Initially dismissed without prejudice, a suit that challenged a stable value provider of taking “hundreds of millions of dollars annually in undisclosed compensation” from retirement plans and participants has come up short.
Here Darlene Dezelan, a participant of the Cedars-Sinai Medical Center 403(b) Retirement Plan, filed suit against Voya Retirement Insurance and Annuity Co. on behalf of that plan, and on behalf of “all other similarly situated employee pension benefit plans covered under the Employee Retirement Income Security Act of 1974,” claiming that Voya “collects hundreds of millions of dollars annually in undisclosed compensation from the retirement plans and participants to whom it owes the highest duties known to law and certain statutory disclosure obligations.”
Specifically, the suit, filed roughly two years ago in the U.S. District Court for the District of Connecticut, alleged that in setting and resetting the crediting rates applicable to the stable value accounts offered by Voya, and setting the amount of and keeping the Income, and in thus determining its own compensation, Voya has breached its fiduciary duties to the plans and their participants.
Moreover, the suit claims that compensation that Voya took for itself not only reduced the investment return on plan assets, but that “defendant’s non-disclosure of the amount of the Income gave it a competitive advantage over other Plan service providers who disclosed all of their fees.”
A year ago, Voya prevailed when this same judge ruled that plaintiff Dezelan lacked standing to bring a fiduciary breach claim under the ERISA – but dismissed the suit without prejudice, permitting her to fix her filing (believe it or not, she had failed to allege she had invested in the Voya stable account fund, and to “state a claim upon which relief could be granted”). Now having done so, Voya moved to dismiss this amended claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure.
Recalling that “all non-conclusory factual allegations are accepted as true, and all inferences are drawn in favor of the plaintiff,” Judge Victor Bolden of the U.S. District Court for the District of Connecticut (Dezelan v. Voya Ret. Ins. & Annuity Co.
, 2018 BL 295369, D. Conn., No. 3:16-cv-01251-VAB, order granting defendant’s motion to dismiss amended complaint 8/17/18), noted that defendant Voya argued that plaintiff Dezelan failed to “plausibly allege [that] Voya took Spread on the Separate Account assets,” and more specifically that she had failed “to plausibly allege the fact the Court deemed critical to any fiduciary breach or prohibited transaction claim related to the Separate Account — that Voya took Spread from the Separate Account assets and used it for its own interests.” For her part, plaintiff Dezelan argued that her amended complaint addressed that “deficiency by alleging sufficient facts permitting the Court to draw the plausible inference … that [Voya] artificially depressed the Credited Rate and failed to pay Plaintiff and the Class.”
Unfortunately for plaintiff Dezelan, Judge Bolden disagreed.
First, he noted that while a fiduciary (which Voya acknowledged being in this case) is obligated to act solely in the interest of plan participants and beneficiaries, “…fiduciaries do not violate their duties [to a pension plan] by taking action which, after careful and impartial investigation, they reasonably conclude is best to promote the interests of participants and beneficiaries,” even if the decision “incidentally benefits the fiduciary.” Bolden also cited precedent that in order to prevail in such allegations, a plaintiff must “plausibly allege that a prudent fiduciary in the same position could not have concluded that the alternative action would do more harm than good.”
Turning to the allegations in the amended complaint – which largely echoed those in the former complaint – Judge Bolden concluded that the shortcomings in those allegations were not addressed. “She still has not plausibly alleged that Voya keeps the Spread that it earns from the Plan’s Separate Account assets in its own account,” he wrote, noting that while the amended complaint included financial statements “to allege the existence of the Spread and Voya’s unreasonable and undisclosed compensation,” those “allegations fall short, however, of stating a plausible claim.” He cited the ruling in the previous case that noted, “even if the Court concluded that Voya artificially depresses the Crediting Rate and creates a Spread, it cannot conclude from the allegations made that the Spread goes to Voya instead of remaining in the Separate Account,” and that the allegations alone “do not give rise to a reasonably inference of Voya’s misconduct.”
With regard to the administration of the Separate Account, plaintiff Dezelan alleged that during a specific six-year period the Separate Account “earned an additional $14,613,885 in unauthorized Spread compensation,” and that – due to “the existence of the magnitude of the Spread, Voya must have set a low Credited Rate.” She suggested that “the gains and losses should have been amortized” and the profits should have been returned to the “participants through the credited rate within 5.75 years,” rather than maintained “within defendant’s other general account assets,” which is “fungible with defendant’s other general account assets and used for general corporate purposes.”
However, saying so didn’t make it so, according to Judge Bolden, who wrote that “she still has not plausibly alleged that Voya keeps the spread that it earns from the plan’s separate account assets in its own account.” Bolden recalled from the previous ruling that “even if the Court concluded that Voya artificially depresses the Crediting Rate and creates a Spread, it cannot conclude from the allegations made that the Spread goes to Voya instead of remaining in the Separate Account.” As for the current allegation, Bolden wrote “these allegations do not provide more than a sheer possibility that a defendant has acted unlawfully.”
As for claims about payments to a party-in-interest plaintiff Dezelan alleged that the investments deposited into the Separate Account are “pooled and invested with Voya’s general account,” but unlike her original complaint, did not allege that Voya “transferred” funds from the Separate Account to its general account, but suggests that Voya essentially “deposits” the excess funds into its general account because “it is simply a matter of allocation in [Voya’s] books and records” since Voya “owns all of the separate account assets…”.
Here again, though Judge Bolden noted that, “as with her original Complaint, Ms. Dezelan has not alleged facts that suggest that Voya has abused its discretion by retaining any Plan assets. She does not allege a specific instance when Voya ‘divested’ the Plan assets or used Plan assets for [its] own personal use and benefit.” Rather, he explains, “she simply alleges that Connecticut law gives Voya the discretion to keep the Spread” and it “likely” does so because it “must [to comply with Connecticut law] have allocated this excess Spread to either its general account or some other account.”
Rather than alleging specific misconduct, the complaint merely states that, “[i]t is simply implausible that [Voya] … would leave tens of millions of dollars sitting in a separate account for absolutely no purpose when Connecticut law permits it to use that money for other corporate purposes.” Bolden noted that “Ms. Dezelan again asks the Court to presume that Voya engaged in a prohibited transaction merely because it had the ability to do so” – and, in response he wrote, “The Court, again, will decline to do so.”
“While ERISA’s prohibited transaction provision is broad, and demands ‘complete loyalty’ to Plan participants, the Amended Complaint must give rise to a reasonable inference that the defendant committed the alleged misconduct,” he wrote.
And ultimately, “because the Court has given Ms. Dezelan leave to amend her Complaint once, the Court will not grant further leave to amend her Complaint and will dismiss this case with prejudice.”