Voya has again defeated a lawsuit alleging violations of the Employee Retirement Income Security Act (ERISA) related to its offering of stable value fund investments to the Cedar-Sinai Medical Center 403(b) Retirement Plan.
The U.S. District Court for the District of Connecticut previously dismissed without prejudice the would-be class action challenge. Darlene Dezelan, the lead plaintiff, unsuccessfully alleged in the original complaint that Voya Retirement Insurance and Annuity Company improperly profited from stable value funds offered to the plan through annuity contracts. Her original complaint was dismissed due to her inability to prove standing, leading to the filing of an amended complaint and this second decision to dismiss—this time with prejudice barring further amendments of the complaint.
The amended complaint focused on Dezelan’s investment in a stable value fund through the plan, a guaranteed separate account product known as Separate Account 896.
“Dezelan alleges that Voya earns undisclosed profits from the separate account profits by depressing the credited rate below the internal rate of return, so the value of the interest accumulation fund, and therefore the money available to the participants, is artificially low,” the decision explains. “She claims that Voya collects ‘a substantial profit’ from the difference between the guaranteed credited rate and the internal rate of return, which she calls the ‘spread.’”
Voya moved to dismiss Dezelan’s amended claims under Rule 12(b)(6), arguing that the claims should be dismissed because she fails to plausibly allege that Voya took spread on the separate account assets in question. Specifically, Voya argued that Dezelan’s amended complaint fails “to plausibly allege the fact the court deemed critical to any fiduciary breach or prohibited transaction claim related to the separate account—that Voya actually took spread from the separate account assets and used it for its own interests.”
For her part, Dezelan argued that her amended complaint “remedies the [deficiencies in the first complaint] 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 and took spread or used spread for itself as excessive compensation.”
Simply put, the court again disagrees. As the decision points out, important to this outcome is the fact that ERISA requires a fiduciary’s “complete loyalty,” but 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. Also relevant, the court points out, is that to state a claim for a violation of fiduciary duty under ERISA, 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.”
Dezelan’s amended claims concerning the separate account had two components, both falling flat. First, she alleged that Voya manipulates the credited rate for its own advantage. To support this claim, Dezelan alleged that Voya was able to receive some $14,613,855 in undisclosed spread compensation between 2009 and 2014 by depressing the credited rate of the separate account. Second, Dezelan alleged that Voya kept the spread by artificially lowering the credited rate rather than amortizing the profits from the spread through the credit rate as required by the contract. 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.”
To support this claim, Dezelan alleged that Voya holds the spread’s profits “within defendant’s other general account assets,” which is “fungible with defendant’s other general account assets and used for general corporate purposes.” She argued that Connecticut laws allow insurance companies to hold separate account assets in its general account.
“As Dezelan has previously conceded in oral argument, however, the contract does not allow for Voya to keep separate account assets, or take the spread, before the contract’s termination,” the decision highlights. “Dezelan’s amended complaint does not remedy this problem. 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. In the amended complaint, Dezelan compiles the 2010, 2012, and 2014 financial statement produced by the plan’s auditor to allege the existence of the spread and Voya’s unreasonable and undisclosed compensation. These allegations fall short, however, of stating a plausible claim. In this court’s previous ruling to dismiss Dezelan’s original complaint, the court held 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 explained in the decision, the citation of the separate account’s earnings from 2009 to 2014 “merely provides further clarification of Dezelan’s allegation that the spread existed.” It fails, however, to demonstrate that Voya kept the spread.
“As a result, these allegations do not provide more than a sheer possibility that a defendant has acted unlawfully,” the decision concludes. “Additionally, the contract does not require that the separate account’s gains and losses are amortized within six years, as Dezelan suggests. And Dezelan does not reference a specific section in the contract that requires a six-year portfolio term. Dezelan’s allegations may be based on the notion that Voya’s investment objective is to outperform the Barclay Capital U.S. Aggregate bond Index because the contract states that Voya’s strategy for the separate account is ‘to outperform the Barclays Capital U.S. Aggregate Bond Index by 50 basis points.’ The Barclay Capital U.S. Aggregate Bond Index has a 5.75-year term. The contract, however, does not suggest that the separate account has the same term length as the Barclay Index’s 5.75-year term. Dezelan therefore cannot plausibly suggest that Voya breached its fiduciary duty by not amortizing the separate account’s gains and losses.”
In the amended complaint, Dezelan also invokes ERISA Section 406(a)(1)(C), which prohibits transactions “if the plan knows that the transaction constitutes the payment of services between a party in interest to a plan,” and Section (b)(1), which prohibits fiduciaries from “dealing with plan assets in their own interests.”
“The factual allegations in the amended complaint, however, fall short, just as the similar, if not the same, factual allegations did in the original complaint,” the decision concludes. “As with her original Complaint, 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.”
The full text of the decision is available here.