Barchock v. CVS Health Corporation , 886 F.3d 43 ( 2018 )

United States Court of Appeals
For the First Circuit
No. 17-1515
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.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
[Hon. Mary M. Lisi, U.S. District Judge]
Before
Torruella, Kayatta, and Barron,
Circuit Judges.
Jason H. Kim, with whom Todd M. Schneider, Schneider Wallace
Cottrell Konecky Wotkyns LLP, Sonja L. Deyoe, and Law Offices of
Sonja L. Deyoe were on brief, for appellants.
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.
March 23, 2018
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BARRON, Circuit Judge. The plaintiffs allege violations
of the fiduciary duty of prudence under the Employee Retirement
Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1001-1461, by
the fiduciaries of an employer-sponsored retirement plan.
Specifically, the plaintiffs contend that a particular investment
fund offered through the plan was invested too heavily in cash or
cash-equivalents for the years at issue and thus that the plan was
imprudently managed and monitored. The District Court dismissed
the complaint for failure to state a claim under ERISA. We affirm.
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. 29 U.S.C. § 1002(21)(A).
ERISA further provides that such a fiduciary has a duty to act
"with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent man acting in a like
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capacity and familiar with such matters would use in the conduct
of an enterprise of a like character and with like aims." Id.
§ 1104(a)(1)(B).
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 29 U.S.C. § 1104(a)(1)(B)). Accordingly, with
respect to whether a complaint states a claim of imprudence under
ERISA, "the appropriate inquiry will necessarily be context
specific." Id.
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 Rule -- is one of conduct, and not a test of
the result of performance of the investment." Id. at 7 (quoting
Donovan v. Cunningham, 716 F.2d 1455, 1467 (5th Cir. 1983)).
Moreover, we explained that "[w]hether a fiduciary's actions are
prudent cannot be measured in hindsight." Id. (quoting DiFelice
v. U.S. Airways, Inc., 497 F.3d 410, 424 (4th Cir. 2007)).
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
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pursuant to 29 U.S.C. § 1132(a), which authorizes any ERISA plan
participant to bring a civil action against an ERISA fiduciary
liable under 29 U.S.C. § 1109 for breach of its duties.
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
1 The undisputed facts are drawn from the complaint and
documents incorporated by it. See Trans-Spec Truck Serv., Inc. v.
Caterpillar, Inc., 524 F.3d 315, 321 (1st Cir. 2008).
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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
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of return higher than money market funds provide" (emphasis
omitted).
With respect to Galliard, the complaint contended that,
as a fiduciary, it breached its duty of prudence under ERISA in
managing the CVS stable value fund by investing "too much" of the
fund's assets in short-term debt obligations equivalent to cash,
as opposed to intermediate-term investments that generally provide
higher returns. Specifically, the complaint alleged that from
2010 to 2013, Galliard invested between twenty-seven and fifty-
five percent of the fund's assets in an investment fund offered by
a different firm that was invested "primarily" in such cash
equivalents. (Galliard allocated the balance of the CVS stable
value fund to intermediate-term investments.) This asset
allocation, according to the complaint, predictably both resulted
in unnecessary liquidity and "acted as an enormous drag on the
duration of the overall Stable Value Fund portfolio, which
depressed returns."
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
2In addition, the complaint made a related allegation that
Galliard's parent company managed a different stable value fund
that, between 2010 and 2013, invested all of its assets in yet
another fund that, in turn, invested less than ten percent of the
fund in "interest-bearing cash or cash equivalents." The complaint
then purported to infer from these allegations that "Galliard well
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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
understood . . . that it was not necessary to maintain such a large
percentage of cash or cash equivalents in a stable value fund."
However, the plaintiffs have abandoned this argument on appeal.
3 The complaint stated that the survey was attached as an
exhibit, although it appears not to have actually been attached.
However, the defendants subsequently filed the survey in the
District Court as an exhibit attached to a declaration by one of
their attorneys, and the plaintiffs did not oppose that filing.
4 The complaint also alleged that, due to the CVS stable value
fund's relatively high investment in cash equivalents, the
"average duration of [the fund's] investments" (presumably
excluding its pure cash holdings) between 2010 and 2012 was
approximately one year, whereas the average duration of
investments by stable value funds participating in the survey
during 2011 and 2012 was approximately three years.
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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 version
of that study from 2011. See David F. Babbel & Miguel A. Herce,
A Closer Look at Stable Value Funds Performance (Wharton Financial
Institutions Center Working Paper No. 07-21, 2007); David F. Babbel
& Miguel A. Herce, Stable Value Funds: Performance to Date (Wharton
Financial Institutions Center Working Paper No. 11-01, 2011).
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
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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 Rule
12(b)(6) of the Federal Rules of Civil Procedure for failure to
state a claim under ERISA. The defendants did not dispute that
they were ERISA fiduciaries. However, they contended that the
complaint did not state a claim that was cognizable under ERISA
because the allegation that Galliard allocated a relatively high
proportion of the fund's assets to short-term, cash-equivalent
investments could not alone support a claim of imprudence. The
defendants also contended that, to the extent that the complaint
was simply alleging that Galliard should have taken more risk with
the fund's investments in order to achieve higher returns, the
plaintiffs were merely criticizing the performance of the fund
with the benefit of hindsight and that such second-guessing could
not support a claim under ERISA for breach of the duty of prudence.
Finally, the defendants contended that the failure to state a claim
against Galliard necessarily meant that the complaint failed to
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state a claim against the CVS defendants for imprudently monitoring
Galliard.
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" critique of Galliard's
management of the fund.
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The plaintiffs then filed this appeal challenging the
District Court's dismissal of the complaint under Rule 12(b)(6)
for failure to state a claim. Our review is de novo. SEC v.
Tambone, 597 F.3d 436, 441 (1st Cir. 2010) (en banc). We take the
complaint's well-pleaded facts as true, and we draw all reasonable
inferences in the plaintiffs' favor. Id. Well-pleaded facts must
be "non-conclusory" and "non-speculative." Schatz v. Republican
State Leadership Comm., 669 F.3d 50, 55 (1st Cir. 2012). As part
of our review, we may consider "implications from documents
attached to or fairly incorporated into the complaint." Id.
(internal quotation marks omitted) (quoting Arturet-Vélez v. R.J.
Reynolds Tobacco Co., 429 F.3d 10, 13 n.2 (1st Cir. 2005)). To
survive dismissal, however, the complaint must "contain sufficient
factual matter, accepted as true, to state a claim to relief that
is plausible on its face." Tambone, 597 F.3d at 437 (quoting
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). "If the factual
allegations in the complaint are too meager, vague, or conclusory
to remove the possibility of relief from the realm of mere
conjecture, the complaint is open to dismissal." Id. (citing Bell
Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)).
II.
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
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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," 29 U.S.C. § 1104(a)(1)(B), the management of a fund labeled
as a stable value fund constitutes the relevant "enterprise" of
comparison. From that implicit premise,5 the plaintiffs then
contend that Galliard -- by allocating twenty-seven to fifty-five
percent of the CVS stable value fund's assets to an investment
fund primarily holding short-term, cash-equivalent investments
-- "departed radically" from the investment standards and logic
5 Given that the plaintiffs are not bringing a
misrepresentation claim, it is not clear why the relevant
comparative enterprise under ERISA here should be the management
of funds labeled as stable value funds, as opposed to a more
general or a more specific category of retirement funds. After
all, the CVS fund stated its investment objective in more general
terms, while the funds that participated in the stable value fund
survey incorporated in the plaintiffs' complaint were not all
similarly structured, as some were "individually managed single-
plan accounts," others were "bank and investment company
commingled pooled funds," and still others were "life insurance
company accounts attached to full service products." But, rather
than affirmatively argue that, for purposes of evaluating whether
Galliard's investment strategy was an imprudent one, the proper
"enterprise" is the management of a fund labeled as a stable value
fund, the plaintiffs just assert that it is the proper one to use.
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then prevailing for the management of such funds. And, in the
plaintiffs' view, we can reasonably infer that Galliard
imprudently invested the fund's assets solely from the fact that
Galliard's "cash"-focused strategy "departed radically" from the
practices and logic guiding the management of such funds. Thus,
the plaintiffs contend, they did not need to allege anything more
about the specific context in which Galliard made particular
investment decisions in order to state a claim of imprudence.
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
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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
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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 of a benchmark
(despite disclosing and then exceeding that benchmark) and not
investing in higher-risk, higher-return instruments. Ellis v.
Fidelity Mgmt. Tr. Co., No. 17-1693, 2018 WL 991515, at *6-8 (1st
Cir. Feb. 21, 2018). And, in doing so, we indicated that
conservativism in the management of a stable value fund -- when
consistent with the fund's objectives disclosed to the plan
participants -- is no vice. "Were this case to proceed to trial,"
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we observed in Ellis, "it is completely unclear by what standard
a jury could find a disclosed choice of benchmark to be imprudent
as 'too conservative,' particularly where plaintiffs make no
argument that offering more conservative investments (such as
money market funds) would constitute an ERISA violation." Id. at
*7. In this regard, we explained elsewhere in the opinion,
"[u]nless we are to say that ERISA plans may not offer very
conservative investment options (such as money market funds or
treasury bond funds), then we cannot say that plans may not offer
different types of stable value funds, including those that are
intentionally and openly designed to be conservative." Id. at *6.
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.
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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 cases
6
See Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 595-96
(8th Cir. 2009) (allegation that ERISA fiduciary invested in funds
with higher management fees as "a quid pro quo" in return for
kickbacks); Krueger v. Ameriprise Fin., Inc., No. 11-02781, 2012
WL 5873825, at *10-11 (D. Minn. Nov. 20, 2012) (allegation that
ERISA fiduciary invested in its own affiliated funds that charged
higher management fees because doing so generated additional
profits for the fiduciary). The only other case to which the
plaintiffs point in which an imprudence claim was allowed to go
forward at the motion-to-dismiss stage included allegations, not
present in our case, that ERISA fiduciaries selected a "relatively
new, expensive, underperforming investment option" because the
funds in which they invested were managed by a firm affiliated
with the retirement plan's record-keeper and trustee, that these
funds charged higher management fees than comparable funds, and
that the funds "had no meaningful record of performance so as to
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-- involving rulings after bench trials, rather than at the motion-
to-dismiss stage -- in which findings of imprudence under ERISA
did not rest on allegations of self-dealing. But, in each of those
cases, the finding that an ERISA fiduciary had violated the duty
of prudence rested on evidence that, in managing investments for
ERISA plan participants, the fiduciary took on more risk than the
fiduciary had disclosed to the participants.7
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
indicate that higher performance would offset this difference in
fees." Lorenz v. Safeway, Inc., 241 F. Supp. 3d 1005, 1019 (N.D.
Cal. 2017).
7
See Cal. Ironworkers Field Pension Tr. v. Loomis Sayles &
Co., 259 F.3d 1036, 1045 (9th Cir. 2001) (overinvestment in
collateralized mortgage obligations was imprudent, "given evidence
that [collateralized mortgage obligations] could be highly risky
investments" and "that the [ERISA-governed trust fund] had very
conservative investment guidelines"); Prudential Ret. Ins. &
Annuity Co. v. State St. Bank & Tr. Co. (In re State St. Bank &
Tr. Co. Fixed Income Funds Inv. Litig.), 842 F. Supp. 2d 614, 646
(S.D.N.Y. 2012) ("enhanced index funds" were imprudently managed
to accept twice as much risk than disclosed to investment adviser
for ERISA retirement plans that had invested in those funds).
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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
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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 were
invested in cash-equivalents. See id. at *9-11.
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
8 In fact, the complaint does not actually allege what the
precise cash-equivalent allocation here was. The complaint
alleges merely that twenty-seven to fifty-five percent of the CVS
stable value fund's assets -- depending on the year at issue
-- were allocated to a separate investment fund that was, in turn,
invested "primarily" in cash equivalents.
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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
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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 fact, the industry survey incorporated by the
complaint indicates that the cash-equivalent allocations in the
surveyed funds ranged widely -- from 0.3 to 36.5 percent in 2011
9The large number of stable value funds is apparent from the
complaint. The industry survey incorporated by the complaint
indicates that forty-three firms participated in the survey, with
over $700 billion in combined stable value assets under management.
It appears, however, that those forty-three firms managed assets
held by many different defined contribution retirement plans. The
survey itself does not say how many plans were covered or what the
variation in the asset allocations of their stable value fund
investments was. But, in this regard, the academic study of stable
value funds on which the complaint relies indicates that there
were over $800 billion invested in stable value funds through
almost half of all defined contribution plans. Babbel & Herce,
Stable Value Funds: Performance to Date, 1. And the study states
that $561 billion of those assets were held by as many as 173,050
plans. Id. at 1 n.4.
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and from 0.44 percent to 48.2 percent in 2012.10 And the complaint
alleges that the CVS stable value fund's allocation to a fund
primarily invested in cash-equivalents was 44 percent in 2011 and
48 percent in 2012. That means, with respect to the two years for
which the survey provides data, that the CVS stable value fund's
cash-equivalent allocation was potentially outside the range of
allocations made by the surveyed funds in 2011 but then was
necessarily within the range of allocations made by the surveyed
funds in 2012.
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
10 The defendants suggest that the low end of the range was
never below two percent. Their estimation of the range apparently
excludes the survey's data from stable value funds offered by life
insurance companies that commingled the assets of unrelated
retirement plans. We instead consider the range that is most
favorable to the plaintiffs, but the difference ultimately has no
bearing on our analysis.
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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
11 It is true that the complaint alleges that money market
yields declined during the crisis. But that additional allegation,
without any additional context, does not make it plausible that a
decision to increase money market investments immediately
following the crisis was imprudent, even if in hindsight it proved
to have been relatively costly.
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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 years. But, in light of the allegations in the
complaint, it would be pure speculation to infer that average
industry allocations in that year -- for which the complaint
provides no survey data -- would have been no different from the
averages derived from the survey data for the subsequent years.
See, e.g., Ellis, 2018 WL 991515, at *6-8 (granting summary
judgment against a claim that an ERISA fiduciary was imprudent
"[i]n the wake of the 2007-2008 financial crisis" by allocating a
stable value fund's assets "away from higher-return, but higher-
risk sectors . . . and toward treasuries and other cash-like or
shorter duration investments," id. at *2).
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
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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
12
As the complaint points out, the updated version of the
2007 study, which was released in 2011, indicated that this trend
generally continued during the financial crisis preceding
Galliard's decisions. However, that version of the study was not
available at the time that Galliard decided to allocate fifty-five
percent of the CVS stable value fund during 2010 to an investment
fund primarily holding cash-equivalents.
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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 inferred. And they certainly do not offer a
theory that would make plausible the notion that the cash-
equivalent allocations of a fund labeled as a stable value fund
are imprudent simply because those allocations are consistently
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larger for a certain number of years than the mean allocations of
five to ten percent derived from all funds (whatever their
particularities) participating in a survey conducted by a trade
association for the stable value industry.
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
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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.
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