MARY BARCHOCK; THOMAS WASECKO; STACY WELLER, Plaintiffs, Appellants, v. CVS HEALTH CORPORATION; THE BENEFITS PLAN COMMITTEE OF CVS HEALTH CORPORATION; GALLIARD CAPITAL MANAGEMENT, INC., Defendants, Appellees.
No. 17-1515
United States Court of Appeals For the First Circuit
March 23, 2018
Hon. Mary M. Lisi, U.S. District Judge
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF RHODE ISLAND. Before Torruella, Kayatta, and Barron, Circuit Judges.
Meaghan VerGow, with whom Brian D. Boyle, Bradley N. García, O‘Melveny & Myers LLP, Robert Clark Corrente, Whelan, Corrente, Flanders, Kinder & Siket LLP, Joel S. Feldman, Mark B. Blocker, Robert N. Hochman, Daniel R. Thies, and Sidley Austin LLP were on brief, for appellees.
Evan A. Young, Shane Pennington, Baker Botts LLP, Steven P. Lehotsky, Janet Galeria, U.S. Chamber Litigation Center, and Janet M. Jacobson, on brief for amici curiae Chamber of Commerce of the United States of America and American Benefits Council.
Brian D. Netter, Nancy G. Ross, Mayer Brown LLP, and Kevin Carroll, on brief for amicus curiae Securities Industry and Financial Markets Association.
BARRON, Circuit Judge. The plaintiffs allege violations of the fiduciary duty of prudence under the Employee Retirement Income Security Act of 1974 (“ERISA“),
I.
To understand the sole issue on appeal, it helps to provide some background concerning the duty of prudence that ERISA establishes. We then describe the particular allegations that the plaintiffs offer in support of the imprudence claims that they bring and the travel of the case. Finally, we briefly review the rulings below.
A.
ERISA provides that any person who exercises discretionary authority or control in the management or administration of an ERISA plan (or who is compensated in exchange for investment advice) is a fiduciary.
Importantly, the Supreme Court has explained that “the content of the duty of prudence turns on ‘the circumstances . . . prevailing’ at the time the fiduciary acts.” Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459, 2471 (2014) (omission in original) (quoting
As we explained in Bunch v. W.R. Grace & Co., 555 F.3d 1 (1st Cir. 2009), in connection with a claim of imprudence concerning an ERISA plan‘s investments, “[t]he test of prudence -- the Prudent Man
B.
In 2016, the plaintiffs -- Mary Barchock, Thomas Wasecko, and Stacy Weller -- filed this suit in the United States District Court for the District of Rhode Island. They did so pursuant to
According to the complaint, the three plaintiffs participated from 2010 to 2013 in an ERISA employee retirement plan that was sponsored by their employer, CVS Health Corporation (“CVS“), and administered by the Benefits Plan Committee of CVS.1 The plan was a 401(k) defined contribution plan that offered several investment options to participants, including what is known as a “stable value fund.” The Benefits Plan Committee appointed Galliard Capital Management, Inc. (“Galliard“) to manage that fund.
All three plaintiffs allocated portions of their retirement investments under the plan to this stable value fund, which held approximately $1 billion in assets. Their complaint alleged that CVS, the Benefits Plan Committee, and Galliard owed the plaintiffs a fiduciary duty of prudence under ERISA with respect to the plan‘s investments in the fund and that each of the defendants breached that duty.
In so claiming, the plaintiffs’ complaint described what a stable value fund is by quoting the description of such funds given by the Seventh Circuit in Abbott v. Lockheed Martin Corp., 725 F.3d 803 (7th Cir. 2013). Specifically, the complaint quoted Abbott as describing stable value funds, or SVFs, as “recognized investment vehicles” that
typically invest in a mix of short- and intermediate-term securities, such as Treasury securities, corporate bonds, and mortgage-backed securities. Because they hold longer-duration instruments, SVFs generally outperform money market funds, which invest exclusively in short-term securities. To provide the stability advertised in the name, SVFs are provided through “wrap” contracts with banks or insurance companies that guarantee the fund‘s principal and shield it from interest-rate volatility.
Id. at 806 (citations omitted).
The complaint did not identify what information was provided by the defendants to plan participants before they invested in the CVS stable value fund. Notably, the complaint did not allege that the plan documents specified how the fund‘s assets would be allocated. The complaint did, however, allege that the fund was part of a mix of investment options that the employer offered in “lifestyle” funds described as “conservative” and “moderate,” as opposed to “aggressive.” The complaint also alleged that, according to the plan‘s Internal Revenue Service Form 5500 Annual Return from one of the years at issue, the fund‘s stated objective was “to preserve capital while generating a steady rate of return higher than money market funds provide” (emphasis omitted).
The complaint further alleged that this asset allocation was a “severe outlier” when compared to allocation averages for the stable value industry.2 And, to identify those averages, the complaint incorporated a survey of industry data from 2011 and 2012.3 That survey was released by the Stable Value Investment Association, which the complaint described as a trade association for the stable value industry. The complaint alleged that, according to the survey, the average mean allocation of assets to cash or cash-equivalent investments by stable value funds surveyed was between only five and ten percent for the years 2011 and 2012.4
Finally, the complaint alleged that Galliard‘s relatively high allocation of investments in short-term, cash-equivalents was at odds with “well-established principles of stable value investing.” The complaint explained that investors in stable value funds generally agree to contractual provisions that restrict the liquidity of their investments in exchange for relatively stable returns from longer-term investments. Yet, the complaint alleged, Galliard‘s excessive allocation of the CVS stable value fund‘s assets to short-term, cash-equivalent investments resulted in liquidity that the investors did not want and for which the plaintiffs paid a premium by losing out on the higher returns generally associated with longer-term investments. And, the complaint asserted, that allocation decision cannot be justified in terms of reducing risk because stable value funds, as conventionally structured, have historically outperformed money market funds -- which invest in cash equivalents -- in terms of both return and volatility. To support that last proposition, the complaint cited an academic study from 2007 and an updated
As for the other two defendants -- CVS and the Benefits Plan Committee -- the complaint alleged that they had breached their duty of prudence by inadequately monitoring Galliard. The complaint asserted that, had they been prudent, they “would have immediately discovered that the reason for the [CVS stable value fund‘s] poor performance was because an unreasonably high percentage of the . . . assets were invested in cash-equivalent accounts that produced abysmal investment returns and that this allocation strategy was highly anomalous by industry standards.” Yet, the complaint alleged, neither CVS defendant “took any action” to change Galliard‘s investment strategy.
The plaintiffs sought declaratory and injunctive relief, as well as reimbursement for losses from reduced investment return, damages, and attorney‘s fees. The plaintiffs also requested class certification on behalf of all participants in the CVS retirement plan who invested in the plan‘s stable value fund.
The defendants moved to dismiss the complaint under
C.
The District Court assigned the case to a Magistrate Judge. The Magistrate Judge recommended dismissing the complaint on the grounds specified by the defendants. The District Court agreed, and it dismissed the complaint and entered judgment in favor of the defendants.
The District Court reasoned that the plaintiffs’ claims were not focused on the prudence of the decisions that Galliard made when evaluated in light of the circumstances prevailing at the time that Galliard made those decisions. Rather, in the District Court‘s view, the plaintiffs were merely alleging that, if the fund‘s investments in cash-equivalents had instead been invested in the same manner as the fund‘s other assets, then the fund would have earned higher returns. The District Court therefore determined that the complaint failed to state a claim under ERISA, as the claim did not even purport to account for the specific context in which the challenged investment decisions were made and instead focused only on how poorly those decisions turned out. In short, the District Court concluded, the complaint was making an impermissible “hindsight”
II.
The plaintiffs then filed this appeal challenging the District Court‘s dismissal of the complaint under
With respect to the claim of imprudence against Galliard, the plaintiffs insist that, contrary to the ruling below, their complaint‘s allegation of imprudent investment is not based merely on the fact that the CVS stable value fund turned out to have performed poorly. For that reason, the plaintiffs insist their imprudence claim against Galliard is “not based on mere hindsight criticism” of its investment strategy.
In pressing this contention, the plaintiffs appear to be asserting that, with respect to ERISA‘s requirement that a fiduciary exercise the prudence that “a prudent man” would use “in the conduct of an enterprise of a like character and with like aims,”
The defendants counter that the plaintiffs have failed to state a plausible claim of imprudent investment management against Galliard under ERISA for the following reasons. The defendants point out that the complaint itself alleges that CVS offered the stable value fund as part of its more conservative retirement plan options and that the fund‘s stated objective was “to preserve capital while generating a steady rate of return higher than money market funds provide.” And, the defendants contend, it is clear from the face of the complaint that Galliard then fulfilled that conservative investment objective that had been disclosed to the plan participants.
In addition, the defendants note, the plaintiffs “do not directly criticize the process by which the Fund‘s investment allocation was selected in pursuit of that objective.” In that regard, the defendants point out that the plaintiffs have abandoned their complaint‘s assertion that Galliard was a sleeping manager who took a “fire-and-forget” approach to asset allocation, in light of the complaint‘s contrary allegations that Galliard actively managed the CVS stable value fund. Nor, the defendants point out, have the plaintiffs “suggested that defendants had something to gain from managing the fund conservatively,” which could raise doubts about the prudence of Galliard‘s investment process.
As a result, the defendants contend that the mere fact that the complaint alleges that Galliard pursued a relatively more “cash“-focused investment strategy than most funds that participated in the industry survey that the complaint incorporates is insufficient to state a claim of imprudence. In their view, such a complaint necessarily fails to provide the kind of context for evaluating Galliard‘s investment choices that Fifth Third Bancorp and Bunch demand.
The plaintiffs do not dispute the defendants’ characterization of what their complaint does and does not allege. Thus, they do not dispute that Galliard met the CVS stable value fund‘s stated objective of preserving capital while outperforming money market funds, which are, as indicated above, “cash“-based. In addition, the plaintiffs clarified at oral argument that they are not arguing that offering money market funds as a retirement plan would in and of itself be a breach of the duty of prudence under ERISA. Nor, the plaintiffs also clarified at oral argument, is their theory that the defendants should be liable for misrepresenting the investment vehicle in which the plaintiffs invested as a stable value fund when it was, in the plaintiffs’ view, managed more like a money market fund.
Thus, on the plaintiffs’ own account, we are left with the following allegation. Given what the plaintiffs contend was then-prevailing stable value management practice and logic, Galliard was imprudent in managing the CVS stable value fund, despite meeting the fund‘s stated investment objective of outperforming money market funds, solely because the CVS fund was managed “too much” like a money market fund. And we are left with that allegation even though, on the plaintiffs’ theory, a money market fund itself is a prudent retirement investment vehicle to offer and the CVS fund was not misrepresented to plan participants as something that it was not.
We have -- just recently -- rejected a claim that an ERISA fiduciary imprudently managed a stable value fund by, among other things, establishing too conservative
Our analysis in Ellis clearly casts doubt on the viability of the plaintiffs’ imprudence claim here. But, we have not previously had occasion to address whether the allegation here that an ERISA fiduciary “departed radically” from the practices and financial logic of like funds could -- on its own -- provide a standard for how conservative is “too conservative” and thus suffice to state a claim of imprudence under ERISA. And the plaintiffs contend that such an allegation can suffice both because a substantial body of out-of-circuit precedent supports that conclusion and because the logic of the statutory provision that imposes the duty of prudence does as well. And so we now consider each of those arguments.
A.
We begin with the plaintiffs’ contention that out-of-circuit precedent supports their position. But, as we will explain, none of the cases on which the plaintiffs rely passed on the question presented here: whether allegations that a stable value fund invested a relatively high proportion of its assets in cash or cash-equivalents, and that such a “cash” allocation departed radically from the logic and practices of such funds, suffice in combination to state a claim of imprudence under ERISA.
Several of the cases cited by the plaintiffs hold merely that alleged differences between a challenged fund‘s performance or characteristics and those of comparable funds suffice to state a claim of imprudence under ERISA where a flaw in the fiduciary‘s decision-making process could be reasonably inferred from allegations of self-dealing.6 The plaintiffs also cite
Finally, the plaintiffs also rely on an unreported district court decision in the Abbott litigation, which is the same litigation that produced the Seventh Circuit‘s decision permitting class certification, 725 F.3d 803, from which the plaintiffs’ complaint quotes in order to describe what stable value funds are. In that litigation, the district court denied the defendants’ motion for summary judgment with respect to a claim that the manager of a stable value fund breached its duty of prudent investment under ERISA. Abbott v. Lockheed Martin Corp., No. 06-0701, 2009 WL 839099, at *9-11 (S.D. Ill. Mar. 31, 2009).
The plaintiffs here contend that their imprudence claim “fit[s] squarely within the claims and rulings in Abbott.” In particular, the plaintiffs represent that the “fundamental allegation” in Abbott was that the fund was imprudently invested in short-term, cash-equivalent investments because between fifty and ninety-nine percent of the fund‘s assets were invested in cash-equivalents. See id. at *9. Thus, the plaintiffs contend that the district court‘s summary judgment decision in Abbott supports their contention that their complaint has stated an imprudence claim against Galliard by alleging that Galliard invested between twenty-seven and fifty-five percent of the CVS stable value fund‘s assets in an investment fund that was primarily invested in cash equivalents.
However, we do not see how the district court‘s summary judgment ruling in Abbott shows that the imprudence claim that the plaintiffs bring here is cognizable. To be sure, at oral argument, the defendants were willing to assume that it might be possible to infer imprudent stable value management from an extreme allocation of assets to cash or cash-equivalents -- perhaps, in their counsel‘s words, if “nearly 100 percent” of a fund‘s assets are so allocated, like the alleged ninety-nine percent cash-equivalent allocation in Abbott. But, as the defendants point out, the high end of the alleged cash-equivalent allocation of the stable value fund in Abbott was much higher than that of the CVS stable value fund here.8 And, more importantly, it is clear from the district court‘s summary judgment ruling that the plaintiffs in Abbott did not allege that the fund there was imprudently managed solely because a relatively high proportion of the fund‘s assets
Thus, the precedents on which the plaintiffs rely do not help their cause. Those precedents simply did not have occasion to pass on a theory akin to that of the plaintiffs -- namely, that imprudence can be inferred solely from their complaint‘s charge that Galliard‘s cash-equivalent allocation “departed radically” from both industry averages and the underlying financial logic of stable value management.
B.
In evaluating whether the plaintiffs’ novel theory nonetheless has force, it is important to keep in mind that the complaint does not allege anything about the particular circumstances that Galliard faced in managing the fund beyond the facts that there was a financial crisis in 2008 during which money market yields declined and that the fund‘s stated objective was “to preserve capital while generating a steady rate of return higher than money market funds provide.” To supply the required context for the plaintiffs’ imprudence claim, the complaint instead relies on the extent to which Galliard‘s cash-equivalent allocations deviated from allocation averages in the stable value industry as well as from what the plaintiffs contend is the inherent logic of stable value funds.
A claim resting on such evidence, however, runs into the concern that we recently set forth in Ellis. For it is hard to see how the fact that a stable value fund was run conservatively indicates that it was being run imprudently, where “plaintiffs make no argument that offering more conservative investments (such as money market funds) would constitute an ERISA violation.” Ellis, 2018 WL 991515, at *7. We see no daylight between the prudence claim rejected in Ellis and that presented here. Even if we grant plaintiffs’ premise and assume that evidence showing a “radical[]” deviation from standard stable value management practice could on its own supply the necessary context to state a claim of imprudence, we do not see how the evidence that the plaintiffs have put forward on that score could suffice.
The plaintiffs emphasize the data contained in the industry survey that their complaint incorporates. But, that survey sets forth the arithmetic mean of cash-equivalent allocations by all of the stable value funds participating in the survey for each year. Neither the survey nor the complaint reveals the distribution of cash-equivalent allocations by the funds participating in the survey that results in the industry-wide arithmetic means that the survey sets forth. And, without such distribution information, it is unreasonable to infer solely from the complaint‘s allegation that Galliard “departed radically” from the annual arithmetic means of cash-equivalent allocations by like funds that Galliard was a “severe outlier” from all other such funds when it came to asset allocation decisions -- at least given the large number of stable value funds that existed.9
In the absence of any additional context, these survey statistics thus show merely that Galliard charted a relatively more “cash“-focused course than most of the funds that were surveyed, while taking the most “cash“-focused course in one year but not in the next year. But, consistent with our reasoning in Ellis, we do not see how those facts alone can suffice to support a plausible claim that such decision-making was imprudent.
Given the paucity of allegations that the complaint makes about the circumstances facing the CVS stable value fund at the time, it would be pure speculation to infer that Galliard did not have a good reason to make those “cash“-heavy decisions.11 After all, we see no reason to accept the plaintiffs’ implicit assertion that, in managing a stable value fund, a decision to take the path less traveled is for that reason imprudent.
To be sure, the complaint does allege that Galliard‘s management of the CVS stable value fund was imprudent in 2010 and 2013 as well. But the survey incorporated by the complaint does not even encompass those years, and the complaint contains no data about how other funds in the industry allocated their investments in either of those years. Thus, the complaint does not provide any direct allegation that the CVS fund was unique in being invested so substantially in cash-equivalents in 2010, the sole year when its cash-equivalent allocation reached potentially as high as fifty-five percent, or 2013, when its cash-equivalent allocation was no more than twenty-seven percent.
Nor does the complaint allege that stable value funds’ average asset allocations in the years not covered by the survey (2010 and 2013) were similar to the industry average allocations for the intervening years (2011 and 2012) that the survey does cover. And, in any event, the CVS fund‘s potential cash-equivalent allocation in 2013 (twenty-seven percent) was well within the range for each year that the survey covers.
Moreover, 2010, which is when Galliard‘s “cash” allocation was at its height, was the year closest to the “2008 financial crisis” referenced in the complaint. That fact may or not make stable value funds’ asset allocations in 2010 distinct from subsequent
Given the evident problem with resting a claim of imprudence solely on these survey data, the plaintiffs’ claim needs to rest on something more in order to be plausible. The plaintiffs contend that the complaint contains that “something more” because it alleges that the “underlying financial logic” of stable value funds renders reasonable an inference that Galliard‘s relatively more money-market-fund-like choices (as the survey data reveal them to have been) were not just cautious but imprudent.
The complaint alleges in this regard that stable value funds have historically outperformed money market funds without increased volatility. And the complaint relies for that allegation on an academic study whose results, at least in part, were available at the time of Galliard‘s investment decisions.12 The plaintiffs then argue that the study suggests that investing in the types of short-term debt obligations that compose money market funds is imprudent if an alternative option to invest in longer-term investments is available and -- as the complaint alleges was true of stable value fund investors -- anticipated liquidity needs are reduced.
The academic study on which the plaintiffs rely, however, does not itself suggest that a stable value fund should refrain from holding any particular proportion of its assets in cash or cash equivalents, such that imprudence could be inferred from Galliard‘s allocations. Rather, with respect to the composition of stable value funds, the study states only that they are “typically comprised of high quality, short maturity (usually well under five years) corporate and government bonds, mortgage-backed securities, and asset-backed securities,” without addressing the extent to which they might also hold cash or cash-equivalents. Babbel & Herce, Stable Value Funds: Performance to Date, 3. And the study then simply makes a retrospective claim that stable value funds, however their assets happened to have been constituted in the past, have historically outperformed money market funds. Id. at 16.
Moreover, at oral argument, the plaintiffs’ counsel emphasized that their theory is not that any investment in cash equivalents by an ERISA fiduciary is by itself a breach of the duty of prudence. Thus, the argument that the plaintiffs necessarily must press is that the underlying financial logic of stable value funds dictates not that any investment in cash or cash equivalents is imprudent but rather that the specific cash-equivalent allocation here was.
The plaintiffs, however, have failed to offer a theory for determining, based on the underlying financial logic of stable value funds, how much liquidity is “too much,” such that imprudence may be reasonably
After all, the plaintiffs have not explained why financial logic makes it plausible to conclude -- without knowing anything more about the particular circumstances affecting an ERISA fiduciary‘s choices regarding asset allocations -- that what the plaintiffs call a five to ten percent “cash buffer” is prudent, but that a buffer closer to twenty-seven to fifty-five percent “cash” is not. Rather, as far as the complaint reveals, the plaintiffs’ only basis for setting the maximum threshold for a prudent “cash buffer” at ten percent is the allegation that the annual arithmetic means of the surveyed funds’ cash-equivalent allocations were no higher than ten percent. The plaintiffs themselves acknowledge, however, that they need to point to something more than merely that the CVS fund‘s cash-equivalent allocations were higher than those means in order to state a claim of imprudence under ERISA. Otherwise, in the plaintiffs’ words, we are left with “just cavils about deviation from industry standards.”
III.
That still leaves the question whether the complaint nevertheless states a claim against the CVS defendants for imprudently monitoring Galliard. However, the complaint alleges no harm other than the stable value fund‘s underperformance as a result of Galliard‘s alleged misallocation of the fund‘s assets. Because of our determination that this alleged harm is not cognizable under ERISA, there remains no basis for supporting a claim against the CVS defendants. Accordingly, we conclude that the complaint also fails to state a plausible claim against the CVS defendants.
IV.
For these reasons, the judgment of the District Court is affirmed.